| Coal India (COAL IN) EBITDA in line; PAT miss; Cash balance lower than estimated | Neutral Price Target: Rs320.00 PT End Date: 31 Mar 2015 |
COAL reported 4Q PAT of Rs44.3bn vs the consensus estimate of Rs48bn, with flat y/y volume growth. The miss was largely due to provisions taken (Rs8.8bn) to account for deemed lowering of coal grade supplied to NTPC for period Oct-12 to Sep-13. EBITDA (excl. provisions) came in at Rs60.2bn, slightly lower than JPMe (Rs62bn) with the miss on account of sharply higher non-cash overburden expenses. Our estimates are currently under review as we await more clarity at the analyst meet tomorrow.
· Adjusted ASP/T increase q/q; E Auction ASP/T even as volumes increase sharply. We estimate bonus incentives stood at Rs8bn and adjusted for this FSA power realizations increased ~5% q/q. E Auction realizations continue to fall and declined ~4% q/q and the implied premium of E Auction to FSA coal price at ~60% was among the lowest in recent times and highlights: a) weak global prices; b) weak domestic demand; and c) increased coal supply by COAL. Total coal volumes sales at 130MT were flat y/y. Supply of coal to the power sector was flat q/q, while E auction volumes increased ~12% y/y. Full year FY14 E Auction volumes stood at 58MT up 18% y/y. Washed coal realizations were up ~5% q/q
· EBITDA impacted by higher overburden removal adj. and social overheads. EBITDA in the quarter came in at Rs60.2bn (-9% y/y) vs. JPMe at Rs62.2bn. Miss vs. our estimates was largely on account of higher overburden removal adjustment at Rs15bn, +70% y/y and higher social overheads at Rs2.4bn, +390% y/y. Employee costs declined 6% y/y, power and fuel costs remained flat y/y. EBITDA margins came in at 30% vs. 3QFY14 at 24% and 4QFY13 at 33%. EBITDA/t declined 9% y/y to Rs464/t.
· Reported PAT impacted by higher provisions and one-offs. Reported PAT came in at Rs44.3bn (-18% y/y) vs. JPMe/Consensus at Rs52bn/Rs48bn. Large PAT miss was on account of higher provisions, which the COAL (in its notes to statements) has attributed to advise from Govt. of India to extrapolate the result of third-party sampling of coal supplies to NTPC during Oct-Dec-13 to period of Oct-12 to Sep-13. As a result, COAL has made additional provisions of Rs8.8bn during the quarter for the said period.
· Balance sheet highlights- Net cash lower than estimated: The key highlight of the balance sheet was the cash balance, which stood at Rs550bn vs our estimate of Rs579bn. Interestingly debtors did decrease H/H from Rs110bn to Rs82bn in the March quarter.
Balance sheet highlights- Net cash lower than estimated: The key highlight of the balance sheet was the cash balance, which stood at Rs550bn vs our estimate of Rs579bn. Interestingly debtors did decrease H/H from Rs110bn to Rs82bn in the March quarter.
· Our earnings are under review as we wait for more clarity at the company’s analyst meet.
Figure 1: COAL's Quarterly Offtake (MT)
Source: Company reports.
Figure 2: COAL's Quarterly ASP trend (Rs/MT)
Source: Company reports.
Figure 3: FSA Volume and ASP trend | Figure 4: E-auction Volume and ASP trend |
Table 1: COAL quarterly performance by FSA/E-auction/Washed Coal
4QFY13
|
3QFY14
|
4QFY14
|
% Y/Y
|
% Q/Q
| |
FSA
| |||||
Oty. (MnT
|
109.5
|
97.62
|
109.11
|
0%
|
12%
|
ASP (Rs/t)
|
1,284
|
1,275
|
1,408
|
10%
|
10%
|
Sales (Rs MM)
|
140,630
|
124,430
|
153,600
|
9%
|
23%
|
E-Auction
| |||||
Oty. (MnT
|
14.9
|
15.14
|
16.75
|
12%
|
11%
|
ASP (Rs/t)
|
2,308
|
2,232
|
2,139
|
-7%
|
-4%
|
Sales (Rs MM)
|
34,386
|
33,800
|
35,830
|
4%
|
6%
|
Washed Coal
| |||||
Oty. (MnT
|
3.63
|
3.35
|
3.03
|
-17%
|
-10%
|
ASP (Rs/t)
|
2,264
|
2,430
|
2,545
|
12%
|
5%
|
Sales (Rs MM)
|
8,217
|
8,140
|
7,710
|
-6%
|
-5%
|
Source: Company reports
Figure 5: COAL's Quarterly Cost/MT trend (Rs/MT)
Source: Company reports.
Figure 6: COAL's Quarterly Employee Cost (Rs B)
Source: Company reports. Historical not restated for reclassification
Figure 7: COAL's Quarterly EBITDA/MT trend (Rs/MT)
Source: Company reports.
Figure 9: COAL's Quarterly Other Income (Rs B)
Source: Company reports.
Table 2: Coal India - Earnings Snapshot
4QFY13
|
3QFY14
|
4QFY14
|
% q/q
|
% y/y
|
FY13
|
FY14
|
% y/y
| |
Net Sales
|
199,046
|
169,281
|
199,980
|
18%
|
0%
|
683,027
|
688,100
|
1%
|
(Acc)/Dec in stock
|
-8,643
|
-79
|
-8,493
|
4,939
|
927
| |||
Internal consumption of coal
|
0
|
0
|
0
| |||||
Consumption of stores
|
20,247
|
17,588
|
22,105
|
26%
|
9%
|
60,621
|
70,221
|
16%
|
Employee costs
|
74,693
|
69,799
|
70,027
|
0%
|
-6%
|
273,208
|
277,694
|
2%
|
Power & fuel
|
5,717
|
6,071
|
5,729
|
-6%
|
0%
|
23,335
|
22,822
|
-2%
|
Contractual expenses
|
19,903
|
18,016
|
21,482
|
19%
|
8%
|
58,020
|
68,275
|
18%
|
Overburden removal adj.
|
8,880
|
7,111
|
15,094
|
112%
|
70%
|
32,017
|
32,866
|
3%
|
Social Overhead
|
487
|
1,656
|
2,389
|
44%
|
390%
|
6,224
|
7,348
|
18%
|
Repairs
|
3,511
|
2,254
|
3,884
|
72%
|
11%
|
8,224
|
9,852
|
20%
|
Other expenses
|
8,236
|
6,053
|
7,514
|
24%
|
-9%
|
26,332
|
26,919
|
2%
|
Total expenses
|
133,030
|
128,468
|
139,731
|
9%
|
5%
|
492,920
|
516,923
|
5%
|
EBITDA
|
66,016
|
40,813
|
60,249
|
48%
|
-9%
|
190,107
|
171,177
|
-10%
|
EBITDA margin
|
33%
|
24%
|
30%
|
28%
|
25%
| |||
Interest expenses
|
127
|
96
|
330
|
452
|
580
|
28%
| ||
Depreciation
|
4,698
|
4,417
|
5,841
|
32%
|
24%
|
18,130
|
19,964
|
10%
|
Provision/write-off
|
4,825
|
-223
|
9,173
|
9,271
|
11,545
|
25%
| ||
Other income
|
22,065
|
21,826
|
23,844
|
9%
|
8%
|
87,467
|
89,694
|
3%
|
PBT
|
78,431
|
58,349
|
68,749
|
18%
|
-12%
|
249,722
|
228,781
|
-8%
|
Prior period adjustment
|
69
| |||||||
Tax
|
24,508
|
19,297
|
24,674
|
28%
|
1%
|
76,227
|
77,679
|
2%
|
PAT
|
53,923
|
39,052
|
44,075
|
13%
|
-18%
|
173,564
|
151,102
|
-13%
|
Extraordinary
|
-216
|
111
|
-267
|
14
| ||||
Reported PAT
|
54,139
|
38,941
|
44,342
|
14%
|
-18%
|
173,564
|
151,117
|
-13%
|
Production
|
143
|
119
|
143
|
21%
|
0%
|
452
|
462
|
2%
|
Dispatches
|
130
|
117
|
130
|
11%
|
0%
|
465
|
472
|
1%
|
Realization/MT
|
1,532
|
1,445
|
1,539
|
7%
|
0%
|
1,469
|
1,459
|
-1%
|
Cost per tonne
| ||||||||
(Acc)/Dec in stock
|
-67
|
-1
|
-65
|
11
|
2
| |||
Consumption of stores
|
156
|
150
|
170
|
13%
|
9%
|
130
|
149
|
14%
|
Employee costs
|
575
|
596
|
539
|
-10%
|
-6%
|
588
|
589
|
0%
|
Power & fuel
|
44
|
52
|
44
|
-15%
|
0%
|
50
|
48
|
-4%
|
Contractual expenses
|
153
|
154
|
165
|
8%
|
8%
|
125
|
145
|
16%
|
Overburden removal adj.
|
68
|
61
|
116
|
91%
|
70%
|
69
|
70
|
1%
|
Social Overhead
|
4
|
14
|
18
|
30%
|
390%
|
13
|
16
|
16%
|
Repairs
|
27
|
19
|
30
|
55%
|
11%
|
18
|
21
|
18%
|
Other expenses
|
63
|
52
|
58
|
12%
|
-9%
|
57
|
57
|
1%
|
Op Cost/MT
|
1,024
|
1,097
|
1,075
|
-2%
|
5%
|
1,060
|
1,096
|
3%
|
EBITDA/MT
|
508
|
348
|
464
|
33%
|
-9%
|
409
|
363
|
-11%
|
Source: Company reports. Note: Historical not restated for reclassification.
Investment Thesis
We like CIL’s long-term story of volume growth and improving realizations, and the scarcity premium means the company is likely to trade at a significant premium to sector valuations. However, we believe that further re-rating will depend on FSA pricing trend, ability to take price hikes, and import requirements. In addition, COAL has a very large FCF, a strong cash-rich balance sheet and minimal capital spend requirements. While dividends have been high in the last two years, in our view: a) they could go higher, and b) a stated payout policy could be put into place, thus allowing investors to view COAL as a yield play.
Valuation
Our Mar-15 price target of Rs320 is based on 6.5x FY16E EV/EBITDA, a 5% discount to global peers given lower volumes for market-priced coal.
Risks to Rating and Price Target
Key upside risks include: a) larger than ~5% price increase in power coal sales; b) special dividend and/or higher than 45% payout; and c) large volume increase.
Key downside risks include: a) no price increase on power coal sales; b) sharp reduction in e-auction coal sales to supply to new FSA; and c) usage of cash in non-productive use.
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