COAL INDIA- Limited upside: Edelweiss

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􀂄 EBIDTA dips ~39% Q-o-Q led by rise in employee cost
Coal India (CIL) reported revenue of INR 116.7 bn (down 2%), EBITDA of INR
18.6 bn (down 39%) and PAT of INR 14.9 bn (down 41%), Q-o-Q, for Q2FY11.
Production and sales volume were 90.5 mt (95.2 mt in Q1FY11) and 99.0 mt
(100.9 mt in Q1FY11), respectively. Sequential decline in production was due to
monsoons.


􀂄 H1FY11 EBITA at 37% FY11E; H2FY11 to be crucial
For H1FY11, CIL reported revenue of INR 236.1 bn (up 17%), EBITDA of INR 49.0
bn (up 47.5%) and PAT of INR 40.2 bn (up 29%), Y-o-Y. H1FY11 sales volume, at
199.9 mt, is up only 2.9% Y-o-Y, partly due to heavier monsoons this year.
H1FY11 volumes are 44% of our FY11 estimate, which makes H2FY11 crucial for
achieving yearly estimate.

􀂄 Total expenditure up 10% Q-o-Q: A dampener
Employee costs and total expenditure have both risen 10% Q-o-Q. Increase in
employee costs was largely due to bonus payments. Most expenses have
increased Q-o-Q, except overburden removal charges (down ~20% Q-o-Q).
Effective tax rate rose to 42% in Q2FY11 from 32%, partly due to income tax of
INR 1,464 mn related to prior years. Adjusting for this item, tax rate is still high
at 36% for Q2FY11.

􀂄 Outlook and valuations: Upsides priced in; downgrade to ‘HOLD’
CIL’s H1FY11 results were muted as H1 is traditionally weaker owing to seasonal
slowdown and also because employee costs were above expectations for Q2FY11.

We remain positive on the company’s overall business model with its globally
leading scale, low cash cost, assured offtake and lower exposure to price cuts.
However, at this stage, we do not see upsides to our forward estimates.
Considering this and with the stock trading above our fair valuation of INR
316/share, we downgrade it to ‘HOLD/Sector Performer’ from ‘BUY/Sector
Outperformer’. We may revisit our recommendation based on a positive surprise
on volumes/costs or value additive acquisitions.