Visit to upcoming rail infra. around SECL mines

Transcription

1 BSE Sensex S&P CNX 28,102 8, August 2015 Update Sector: Utilities Coal India CMP: INR409 TP: INR450 (+10%) Buy Stock Info Bloomberg COAL IN Equity Shares (m) 6, Week Range (INR) 447/332 1, 6, 12 Rel. Per (%) -4/14/4 M.Cap.(INR b)/(usd b) 2,583/40.4 AvgVal.INRm/Vol /4180 Free float (%) 20.3 Financial Snapshot (INR Billion) Y/E Mar E 2017E Sales EBITDA NP* EPS (INR)* EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) EV/EBITDA (x) Div. Yield (%) Shareholding pattern (%) As on Jun-15 Jun-14 Promoter DII FII Others FII Includes depository receipts Stock Performance (1-year) Visit to upcoming rail infra. around SECL mines CERL on track Coal India s (CIL) target of doubling its production to nearly one billion ton is contingent on the execution of three critical rail links. We visited the 3.5mtpa Chhal coal mine and met rail officials at Bilaspur to understand the rail freight congestion. Key takeaways: Chhattisgarh East Rail Ltd. (CERL) a subsidiary of SECL (CIL s subsidiary) is executing a 74km rail link between Kharsia (near Raigarh on Mumbai- Kolkata line) and Dharamjayagarh, which will help evacuation of 60-70mt coal from Mand Raigarh coal filed. We visited three of the five main bridges under construction on this line. Work has started on most of the bridges and the work on substructure of bridge#24 is in advanced stages. The line will be extended by 28km to Dongamauha and will connect Gare coal mines. The cost of CERL project expected to be completed within two years is INR25b and Only INR1.5b has been spent so far as the project is in early stages. Land acquisition is in advanced stages and expected to be completed by October Nearly 30-40% of civil work tendering is completed. Chhattisgarh East West Railway (CEWR) a subsidiary of SECL is executing a 131km rail link between Gevra and Pendra, which will connect Korba coal field (major mines of SECL) directly to Bilaspur-Katni section at Pendra road and avoid busy Champa-Bilaspur section and help evacuation of coal to northern India. The project is in early stages and there are challenges because of difficult terrain. We met South East West Central Rail (SEWCL) officials at Bilaspur to understand freight congestion in the region. Bilaspur-Champa route is the busiest, carrying more than 100mtpa freight, followed by Bilaspur-Katni section at 40-50mtpa it is being converted into double line and the work is expected to be completed by June 2017 and will help transport SECL s coal to north India. The 3.5mtpa Chhal coal mine in Mand Raigarh coal field will expand to 6mtpa. The mine is highly profitable owing to low production cost as both RoM and OB removal is outsourced. Most of the coal is sold in E-auction. As expected, coal prices in E-auction are trending down on improved domestic supply and weakening of import prices. The recent months have seen a significant dip in demand from the aluminum sector owing to collapse of metal prices and the resultant cut in production by smelters such as Balco and Hirakud. Bulging steel imports have hurt the profitability of steel sector and demand of coal. Coal prices were close to floor in the July auction as CIL tried to push more volumes during lean demand periods. Sanjay Jain (SanjayJain@MotilalOswal.com); /Nalin Bhatt (NalinBhatt@MotilalOswal.com) Dhruv Muchhal (Dhruv.Muchhal@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 The dispatches of certain high-grade coal are affected because of a fall in import prices. However, the volumes are not material for CIL. We have factored a correction of about 15% YoY in e-auction realization for FY16E. However, we need to watch out for actual realization because successful bidders don t mind losing earnest money (INR114/t) paid in forward auction and reneging if the prices in spot e-auction fall more than that. Auction of non-power linkages (although delayed from original schedule) are likely to boost realization. Slower-than-expected industrial activities are a temporary setback for coal demand. However, we believe CIL s prices are more competitive for sponge iron producers compared with that of imported coal. As the industrial activity picks up, CIL is likely to command a price equivalent to that of imported coal parity adjusted for grade because of advantage of proximity. We opine that Coal Ministry s plan to allot power sector coal directly to consumers, i.e. state power distribution companies (Discoms), will also ease pressure on logistics. As the Discoms invite bids for supply of power at the lowest cost, we expect many of the stranded power projects (20-40GW) located in proximity to CIL s coal mines to turn competitive because of obvious savings in transportation; this is likely drive increased investment in power transmission and will create some more headroom for CIL to seek price hike on coal supply to power sector. We continue to believe that CIL will be able to grow dispatches at 10% CAGR to 781mtpa by FY20. We remain conservative compared with CIL s target of 908mt by 2020 in view of execution risks. The production growth, increasing net attrition and increasing share of lower-cost contracted production augur well and will provide significant operating leverage. CIL s adjusted EBITDA is likely to rise at 13.7% to INR394b by FY20, largely benefiting from operating leverage and transparent pricing for the nonpower sector. We value the stock at INR450 per share based on DCF valuation (WACC of 12.8%). The stock is trading at 7.8x FY17E EV/EBTIDA. Maintain Buy. 10 August

3 Site visit photos Exhibit 1: Rail infrastructure (CERL and CEWR) projects around SECL coal mines Exhibit 2: Kharsia ( CERL begins = 0kms) Exhibit 3: Bridge 17 on Mand River at 8 th Km (piling started) Exhibit 4: Major SECL mines linked to upcoming railway infrastructure FY15 FY20E SN Major coal mines Coal field Cap. CIL MOSL (mt) (mt) (mt) (mt) 1 Gevra Korba 70 BF Kusmunda Korba 50 BF Pelma Mand Raigarh 10 GF RAI Mand Raigarh 15 GF Chhal Mand Raigarh 6 GF Madannagar Mand Raigarh 12 GF BF = Brownfield; GF = Greenfield, Company 10 August

4 Exhibit 5: Bridge number 24 (13kms from Kharsia) on Kurkut river; substructure work in advance stages Exhibit 6: Bridge no. 52 Exhibit 7: Bridge 52 is planned over Kurkut river Exhibit 8: 3.5mtpa Chhal coal mines (SECL) Exhibit 9: Chhal coal mine will expand to 6mtpa 10 August

5 E-auction prices trending down Exchange reported e- auction realization was down ~INR310/t QoQ to INR1,931/t. The correlation v/s. Coal India reported realization has been close in the past. Exhibit 10: E-auction realization CIL v/s. exchange reported E-auction real. - CIL - INR/t E-auction real. - exchanges - INR/t 3,100 2,700 2,300 1,900 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16, Company Data, MJunction E-auction realization is expected to have declined further in July Data from one of the e-auction platforms (MJunction) indicates that realization at the MCL subsidiary was close to the reserve price in July auctions, as against a premium of ~INR /t in the previous months. Exhibit 11: E-auction realization trend for Coal India s MCL mines for the last four months Apr-15 Jun-15 Jul-15* Qty. Realized Reserve Qty. Realized Reserve Qty. Realized Reserve Qty. Realized Reserve MCL mines Allotted Price Price Allotted Price Price Allotted Price Price Allotted Price Price (kt) (INR/t) (INR/t) (kt) (INR/t) (INR/t) (kt) (INR/t) (INR/t) (kt) (INR/t) (INR/t) Ananta 100 1,588 1, ,863 1, ,739 1, ,091 1,068 Balram 200 1, , , Basundhara 90 1,608 1, ,584 1, ,916 1, ,375 1,374 Belpahar 80 1, , , , Bharatpur 40 1,616 1, ,858 1, ,663 1, ,068 1,068 Bhubaneswari 100 1,644 1, ,779 1, ,929 1, ,076 1,068 Chendipada ,201 1,140 0 HBI 0 5 2,244 2, Hingula 208 1,134 1, ,284 1, ,135 1,134 Jagannath 80 1,749 1, ,882 1, ,608 1, ,069 1,068 Kaniha 100 1,069 1, ,070 1, ,079 1, ,069 1,068 Kulda 180 1,528 1, ,676 1, ,660 1, ,140 1,140 Lakhanpur 300 1,350 1, ,455 1, , ,305 1,134 Lilari 50 1,290 1, ,642 1, ,891 1, ,284 1,284 Lingaraj 100 1,327 1, ,646 1, ,599 1, ,071 1,068 Nandira 15 2,980 2, ,980 2, ,980 2, ,980 Samleswari 150 1,408 1, ,713 1, ,022 1, ,325 1,134 Talcher 1 2,980 2, ,982 2, ,980 2,980 Total/Average/Average 1,794 1,426 1,184 1,637 1,516 1,195 1,675 1,565 1,177 1,674 1,197 1,150 Premium over reserve price *July 2015 data represents only the quantity sold through the MJunction platform, Company, MJunction 10 August

6 E-auction quantity offered through MJunction platform was at more than 15 month high in July While this represents data from only a single platform, likely lower off-take by the power sector would have driven e-auction volumes higher for Coal India in July Exhibit 12: E-auction quantity offered through MJunction platform MJunction platform mt 2.2 Apr Jun Aug-14 Offered - mt Oct Dec % of CIL total Feb-15 Apr Jun-15 (%) Jul-15, Company Coal based power generation growth has slowed down over the past few months, driving coal demand lower. Exhibit 13: Coal based power generation growth 3 months average (%) Coal based power generation - 3m avg. (YoY %) Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Jul-15 Source: CEA 10 August

7 E-auction realization and volume trend June 15 Exhibit 14: Monthly e-auction allocated quantity Allocated (mt) Exhibit 15: Monthly e-auction offered quantity Offered (mt) May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar Exhibit 16: Average e-auction realization INR/t Source: MJunction Exhibit 17: Realization trend CIL v/s. exchanges Source: MJuntion Avg. realization - INR/t 3,100 2,700 E-auction real. - CIL - INR/t E-auction real. - exchanges - INR/t 2,277 2,204 2,214 2,164 2,349 2,291 2,118 2,118 2,137 2,164 2,183 2,256 2,316 2,547 2,986 3,267 3,330 3,549 3,090 2,075 2,216 2,305 2,220 2,011 1,879 1,879 2,300 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 1,900 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Exhibit 18: Average realization (G1-G8 grade) INR/t Source: MJunction Source: MJuntion Exhibit 19: Average realization (G9-G17 grade) INR/GCV Act. Real. (G1-G8) - INR/t at reserve price - INR/t Act. Real. (G9-G17) - INR/t at reserve price - INR/t May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 4,329 4,231 3,752 3,929 4,059 4,286 3,034 3,137 3,296 3,343 3,369 3,303 3,304 3,631 3,723 4,106 4,339 4,411 4,245 3,532 3,791 4,146 3,866 3,405 3,154 3,038 1,682 1,586 1,532 1,506 1,410 1,406 1,462 1,527 1,514 1,522 1,604 1,708 1,834 1,954 2,189 2,291 2,351 2,392 2,716 2,333 1,455 1,611 1,664 1,577 1,448 1,501 1,500 Source: MJunction Source: MJuntion 10 August

8 Financials and valuations Income Statement (INR Million) Y/E March FY11 FY12 FY13 FY14 FY15 FY16E FY17E Net Sales 502, , , , , , ,764 Change (%) Operating Expenses 365, , , , , , ,374 EBITDA 136, , , , , , ,390 % of Net Sales adj. EBITDA/ton Depreciation 17,654 19,692 18,130 19,964 23,198 22,194 22,889 Interest Other Income 49,615 76,150 88,373 89,694 86,761 87,148 82,992 Extra Ordinary 2, PBT 165, , , , , , ,237 Tax 55,959 64,845 76,227 77,679 78,573 78,730 88,491 Rate (%) PAT before Min. Int. 109, , , , , , ,745 Reported PAT 109, , , , , , ,745 Change (%) Adjusted PAT 110, , , , , , ,745 Change (%) Balance Sheet (INR Million) Y/E March FY11 FY12 FY13 FY14 FY15 FY16E FY17E Share Capital 63,164 63,164 63,164 63,164 63,164 63,164 63,164 Reserves 269, , , , , , ,631 Net Worth 333, , , , , , ,795 Minority Interest Loans 13,664 13,054 10,778 1,715 4,019 1,515 1,424 Defferd tax Liabiity -11,941-11,941-22,550-19,717-19,596-19,596-19,596 Capital Employed 335, , , , , , ,281 Gross Fixed Assets 376, , , , , , ,403 Less: Depreciation 238, , , , , , ,155 Net Fixed Assets 137, , , , , , ,248 Capital Work in Progress 11,459 29,034 34,960 45,053 40,440 46,234 51,457 Investments 10,637 19,814 23,950 37,749 28,134 13,406 14,076 Inventory 55,856 60,713 56,178 55,681 61,838 65,744 77,777 Debtors 34,189 56, ,802 82,410 85,219 90, ,184 Other Current Assets 0 30,347 42,489 54,375 78,690 83,660 98,972 Loans and Advances 120, , ,760 77,594 88,268 81,135 90,522 Cash 458, , , , , , ,889 Current Liabilities 338, , , , , , ,299 Provisions 175, , ,567 1,912 2,103 2,314 2,545 Net Curr. Assets 175, , , , ,734 71,010 28,500 Application of Funds 335, , , , , , ,281 E: MOSL Estimates -444, , , , August

9 Financials and valuations Ratios Y/E March FY11 FY12 FY13 FY14 FY15 FY16E FY17E Basic (INR) Adjusted EPS Growth (%) Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E Cash P/E EV/Adj. EBITDA EV/Adj. Sales EV /m ton of Reserves Price/Book Value Dividend Yield (%) Profitability Ratios (%) Reported RoE RoCE Adj. RoCE Leverage Ratio Net Debt/Equity (x) Cash Flow Statement (INR Million) Y/E March FY11 FY12 FY13 FY14 FY15 FY16E FY17E PBT before EO Items 163, , , , , , ,237 Add : Depreciation 17,654 19,692 18,130 19,964 23,198 22,194 22,889 Interest Less : Direct Taxes Paid -55,959-64,845-76,227-77,679-78,573-78,730-88,491 (Inc)/Dec in WC 4,662 76,585-16,757 3,625 37,223 45,272 39,925 CF from Operations 130, , , , , , ,816 (Inc)/Dec in FA -16,153-22,286-15,068-28,958-31, ,999-71,545 Free Cash Flow 114, , , , , , ,271 (Pur)/Sale of Investments 2,183-9,177-4,136-13,799 9,615 14, CF from Investments -13,970-31,463-19,204-42,757-21, ,271-72,216 (Inc)/Dec in Net Worth ,277 7, (Inc)/Dec in Debt -5, ,276-9,063 2,305-2, (Inc)/Dec in Differed Tax Liability -2, ,610 2, Less : Interest Paid Dividend Paid -33,611-74, , , , , ,771 Others -5,836-12,540-9,210-12,406-13,676-11,432-11,068 CF from Fin. Activity -49,199-90, , , , , ,186 Inc/Dec of Cash 67, ,963 40,332-98,465 7,030-31,451-2,585 Add: Beginning Balance 390, , , , , , ,474 Closing Balance 458, , , , , , ,889 E: MOSL Estimates 10 August

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