BJP win in Jharkhand to boost CIL's volumes

State accounts for 11-12% of CIL production; resolving issues in the state will boost output

The Bharatiya Janata Party (BJP) will form the next government in Jharkhand and this is good news for consumers of coal in India. For the first time, the state has seen a single alliance get elected with a clear majority. The state has 27 per cent of India's coal reserves and 11-12 per cent Coal India's (CIL) production. Given CIL intends to increase coal production by 20 per cent over FY14-19, the change in guard at the state will help the Centre execute key mining and rail projects, which have remained stuck for several years.

Analysts claim over the past few years, key projects such as the railway line connecting Tori-Shivpur-Kathautiya line, which would provide key evacuation infrastructure from CIL's North Karanpura coal field, which has the potential of an increase of 100 million tonnes (mt) a year. Given that the railway connectivity from these fields to the other parts has been weak, production has not been increased. However, with a BJP government taking charge in Jharkhand, the implementation of projects will help boost Coal India's production to the targeted one billion tonnes by 2019.

  The Central government has set a steep target of one billion tonnes of output by Coal India over the next five years, suggesting a 17 per cent compounded annual growth rate (CAGR) over the next five years. In FY15, Coal India is expected to produce 492 mt and the Street expects this to increase to 572 mt by FY17. Coal India has signed 161 fuel supply agreements covering 73.6 gigawatt (GW) of capacity. In FY15, Coal India is bound to supply 65 per cent of actual contract value, which increases to 67 per cent in FY16 and 75 per cent in FY17. According to Ambit Capital, with rising focus on improving CIL's productivity, the probability of CIL committing to supply as much as 75 per cent of actual contracted quantity (ACQ) is higher.

The brokerage says its calculation suggests a production CAGR of 8.7 per cent over FY14-17 for CIL to meet 90 per cent of its ACQ by FY17. Analysts are betting on the Coal India stock thanks to this expected pick-up in production. On a valuation based on discounted cash-flows, Daiwa Securities has a 'buy' rating on the stock and 12-month price target of Rs 450. Higher output should aid earnings growth, believe analysts, provided the government addresses issues of land acquisition, environmental clearances and rail infrastructure.