Coal India’s September quarter adjusted net profit plummeted 28% to Rs 21.9 billion, worse than our Rs 26 billion expectation. Power and freight expenses jumped 12% due to a 14% increase in railway freight charges. Production increased 5% but offtake volume growth lagged at only 1.3%.
We expect Coal India to increase prices in the third quarter of fiscal 2015. This is in-line with our thesis that the company can increase prices in line with cost inflation. Coal India will invest Rs 110 billion in 1600 MW of thermal power plant capacity. This is a new announcement and we neither capture the capex, nor the volume. We await more clarity on the plant's end purpose, whether it is 100% commercial or part commercial and part captive. We make no change to our production assumptions with volumes constrained by available capacity.
We maintain our fair value at Rs 350 per share. Our fair value estimate implies a dividend yield of 5%. Coal India is a high quality company but is close to fairly valued. We continue to expect Coal India to maintain a strong balance sheet with a robust free cash flow sufficient to fulfill capital commitments and high dividend payouts for the foreseeable future. We think the company enjoys a narrow moat due to cost advantage afforded by vast and relatively shallow open cut coal mines. Medium fair value uncertainty reflects intrinsic risks in coal mining despite a position near the low end of the cost curve.
We believe that government steps of allocating additional mines to Coal India and fast tracking the rail track construction will help in affirming our forecast for acceleration in Coal India’s volume growth. However, government estimates of 1 billion tonnes production by 2019 will require much higher speed of work on mine to rail connectivity and wagon provision. Our full year production forecast remains 485 million tonnes, including a production up-tick from December quarter.
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