Coal India Ltd - Company Update- Revenue enhancing measures offer relief: Centrum

Rating: Buy; Target Price: Rs330; CMP: Rs287; Upside: 15%



Revenue enhancing measures offer relief



We retain Buy on Coal India with a revised TP of Rs330; the marginal
relief for realizations post hike in WCL non-coking coal prices and in
sizing & loading charges could reverse the recent underperformance of
the stock. Realizations had come under pressure due to inferior coal
mix & inventory sales in H1FY14; better mix in H2 coupled with pricing
measures should be materially beneficial. We expect positive EBITDA
impact of Rs20-25/tonne due to the above initiatives. However, since
new FSA for ~71GW has already been signed, we remove the benefit of
FSA incentives completely from FY15E. We maintain our volume estimates
but revise EBITDA for FY14E/15E upwards by 2.1%/4.2%.



$ WCL price hike and increase in sizing & loading charges to support
realizations and EBITDA: WCL accounts for ~9% of CIL’s volumes and we
see positive EBITDA impact of ~Rs10/tonne due to the price hike of 10%
for non-coking coal off WCL. CIL has also announced an increase in
charges for sizing and rapid loading of coal and guided for additional
Rs2bn of revenues from this for the rest of FY14. Our calculations
suggest Rs10-15/tonne positive EBITDA impact for CIL due to this. We
see blended realizations increasing by ~2% from both these measures
combined.



$ Higher new FSA supply requirement to wipe out incentives: CIL has
signed ~71GW of new FSAs already and higher coal supply requirement
from these new FSAs (to power plants which meet all conditions of
these new FSAs on plant commissioning, PPA etc) will wipe out the
incentives earned in the past for higher supplies on old FSAs as we
see supplies getting diverted to meet obligations of new FSA’s.
Additionally, there is a likelihood of diversion of coal from
e-auction to meet the demand if required. We build in no incentives
from FY15E and expect e-auction volume share to drop to 8.5% by FY17E
from 10.6% in FY13.



$ Earnings revised upwards, CIL likely to appeal against CCI penalty:
CIL (according to media reports) is likely to appeal against the
recent Competition Commission order imposing a penalty of Rs17.7bn
(~3% of cash reserves, Rs3/share) for abusing its dominant position.
We do not expect any negative impact of the order and have not
factored in any penalty outgo in our estimates. We maintain volume
estimates for FY14E/15E to ~484MT/508MT but adjust blended
realizations higher by 0.5%/0.9% to factor in higher revenues from WCL
and sizing & loading charges mitigated to some extent by loss of
yearly incentives (we expect no incentives from FY15E). We revise our
$ EBITDA estimates upwards by 2.1%/4.2% for FY14E/15E.



$ Valuations attractive, higher dividend a realistic expectation: We
find the valuations undemanding, adjusted for OBR provisioning (~20%
discount to global peer average). Additionally, we remain positive on
i) high cash on books and dividend yield of 5%+ with a strong
likelihood of special dividend in the next 3-6 months and ii)
potential upside in volumes and pricing on the back of strong demand
and improvement in logistics/railway rake availability. Recent
announcement of deferment of divestment is also a positive. Key risks
are lower volumes due to rake shortage & production bottlenecks,
penalties on new FSAs due to large shortfall in supply and larger loss
in e-auction volumes for new FSAs.



Thanks & Regards,

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