03 March 2012

Coal India Ltd. (CIL) – Q3FY12 results higher-than-expectations; Aditya Birla Money

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Coal India Ltd. (CIL) – Q3FY12 results higher-than-expectations; recent PMO
directive not as bad as it seems; maintain Accumulate rating with a revised target
price of `367


Coal India Ltd. (CIL) Q3FY12 results were above our expectations on account of higher-thanexpected
realisations from e-auction sales
Key Highlights
 CIL’s consolidated net sales grew 21.0% YoY to `15.3bn. Production increased 0.7% YoY to
114.6mn tonnes. Dispatch declined 0.5% YoY to 110.0 mn tonnes. The YoY increase in net
sales was on account of the price increases taken in February 2011 and higher realisations
from e-auction coal sales. E-auction coal realisations increased 17.1% QoQ to `2852 per
tonne
 CIL’s consolidated EBITDA grew 33.6% YoY to `45.5bn on account of increase in coal
realisations. Provisioning for wages were to the tune of `7.5bn
 CIL’s consolidated adjusted PAT grew 53.4% YoY to `40.3b on account of higher EBITDA
and non-operating income. Non-operating income increased 48.4% YoY to `18.6bn.
Outlook and Valuations
 Revise FY12E EPS upwards and FY13E EPS downwards: On account of less-than
expected coal production and sales volume for 9MFY12 (production decline of 2.7% to
291.2mn tonnes and almost flattish sales of 299.6mn tonnes), we reduce our production and
sales volume assumptions for FY12E by 2.0% and 4.6% to 427mn tonnes and 433mn
tonnes respectively. On account of higher-than-expected e-auction realisations, though, our
adjusted FY12E EPS increases by 3.2% to `23.7. For FY13E, we reduce our production
volume assumption by 2% to 448mn tonnes and slightly increase our sales volume
assumption by 0.2% to 466mn tonnes. On account of lower e-auction sales, though, our
FY13E EPS decreases by 4.4% to `26.9.
 Recent PMO directive to sign FSA’s with LoA based power projects at 80% penalty
trigger level is not as bad as it seems: We estimate incremental coal supply obligation
from the PMO’s directive for CIL at ~62.3mn tonnes for FY13E. We believe that CIL would
be able to meet it through (1) release of inventory, (2) diversion of e-auction coal, (3)
diversion of coal from existing FSA’s where it is supplying higher than the threshold,
and 4) increase in coal production. However, CIL is likely to face a production
shortfall of ~18-20mn tonnes annually from FY14E onwards to meet the likely coal
supply obligation from the PMO’s directive as the benefit of sale of excess inventory
wouldn’t be available in FY14E. This shortfall is likely to be met through coal imports,
which, we believe will be a pass through for CIL (Refer Page-2 for details)
 Valuations: With the revision of earnings estimates, likely higher coal production through
faster MoEF clearances over the medium-to-long term and incorporation of a lower risk free
rate of 8.25% from 8.75% earlier – decreasing the cost of equity to 12.8% from 13.25%
earlier -- our 1 year forward DCF value increases by 5.0% to `367 from `350 earlier. Note
that we have already factored in the full impact of the 26% profit sharing provision of
the MMDR bill (17.2% of our 1 year forward DCF value of CIL). Our target price implies
a potential upside of 13.9% from the CMP. We, thus, retain our Accumulate rating on
Coal India.

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