Coal India stock rating: Kotak says Reduce, TP of Rs 255

Coal India reported 5% y-o-y growth in dispatches for the month of November 2017, a drop from the strong-double digit growth of the preceding few months as the favorable-base effect catches up. A demand-supply mismatch and lower inventories led to sharp improvement in supply to the power sector, as well as reflected in improvement in e-auction premiums for October 2017. Maintain REDUCE rating with target price of Rs 255/share. Coal India reported 5 % y-o-y growth in dispatches for November 2017, lower than the 12% y-o-y growth reported in October 2017. Production volumes continue to show modest trends registering a weak growth of 2.6% y-o-y in November 2017 in comparison to 16 % y-o-y growth seen in August 2017. We note that volume growth for CIL will likely moderate from hereon, as the favorable base advantage begins to wane.

Five of out of seven subsidiaries reported positive volume growth in coal dispatches in November 2017 with WCL showing the highest 23% y-o-y growth followed by NCL and SECL (+6% y-o-y). BCCL continues to struggle on the volume front with 12% y-o-y decline in dispatches in November 2017, taking the YTD decline to 6 %. E-auction premiums have shown a strong spike in October 2017 with premium rising to as high as 95 %. This spike is encouraging and reflective of the scramble for coal supplies as well as rising prices of imported coal. The recent ban on pet-coke in Rajasthan, Uttar Pradesh and Haryana will further strengthen the demand for auction coal.

Rising prices of imported coal will also support demand and price trends in the open market. We note that coal inventories at power plants are meaningfully low, with average inventory of only seven days and as many as seven power plants having critical levels of inventory with another eight plants having super- critical levels of inventory.

Coal India Ltd