Coal India Rating: Buy; August output/offtake lowest in 3 years

Coal India (CIL) has reported a 10% y-o-y decline each in August production and sales volume, now down to their lowest levels in the past three years. Key highlights: (i) Larger subsidiaries MCL (Mahanadi Coalfields Ltd) and SECL (South-Eastern Coalfields Ltd) accounted for the bulk of the decline; (ii) continued low rake availability – down to 178/day in August from 205/day in July—dampened offtake; (iii) production volume was hit by fatalities at MCL and SECL and higher-than-normal rainfall. That said, we expect an uptick in production/offtake Q3 onwards as: (i) weather-related issues subside; (ii) rake availability improves; and (iii) production normalises at MCL and SECL.

Hence, we do not believe our FY20e volume growth of 4.6% is at risk, but note that CIL’s target of 8.5% is daunting. That said, a healthy dividend yield and free cash flow are positives. Maintain Buy with a TP of Rs 235 (8.6x FY21e EPS).

August production/offtake disappoint CIL’s August 2019 production and offtake volume decline is the worst in the past three years. Production and offtake slid 10% y-o-y each to 34.8mt and 40.5mt, respectively. Key highlights: (i) Production at MCL was impacted by about 3mt owing to fatalities in late July; (ii) SECL’s production was impacted by fatalities due to a mine accident on 20 August, not to mention the delay in finalisation of subcontracts; and (iii) production at WCL (Western Coalfields Ltd) dipped owing to higher-than-expected rainfall in August. On the offtake front, lower rake availability led to loading of 178 rakes/day compared with 205/day in July 2019.

Coal India Ltd