Coal India Ltd.|Q2FY15 Result Update | Below our expectation, Maintain HOLD with target price of Rs. 422 :: IndiaNivesh

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Below our expectation, Maintain HOLD with target price of
Rs. 422
Coal India reported Q2FY15 consolidated numbers below our expectation. Revenue
increased 2% y-o-y to Rs 156.7 bn, lower than our expectation of Rs 168.3 bn due to
lower e-auction volume coupled with realization. Off On operational front, Off-take
and production increased by 1.3% and 4.9% YoY to 110.5 MT and 102 MT
respectively. Blended realizations (both from regulated and E-auction coal) for
September quarter stood at Rs 1419 per tonne vs. Rs. 1489 per tonne in Q1FY15,
and Rs 1412 in Q2FY14. EBITDA margin contracted significantly y-o-y by 493 bps to
13.2% due to increase in employee cost, overburden removal adjustment and
contractual expenses.

EBITDA margin stood at 13.2% vs. expectation of 20.3%
EBITDA margin contracted sharply y-o-y by 493 bps to 13.2% vs our expectation of
20.3% due to increase in employee cost, overburden removal adjustment and
contractual expenses. Employee cost increased (as a % of Total Income) from 45.25%
in Q2FY14 to 46.48%. Overburden removal adjustment increased (as a % of Total
Income) from 3.04% in Q2FY14 to 3.53% in Q2FY15 where as contractual expenses
increased (as a % of Total Income) from 9.04% in Q2FY14 to 10.37%. However, other
expenditures decreased (as a % of Total Income) from 4.28% to 4% during the same
period.
Following contraction in operating margin, PAT down 28% YoY
The company reported PAT of Rs. 21.92 bn down 28.2% y-o-y and 45.6% q-o-q
below our expectation of Rs 35.45 bn due to lower EBITDA and higher effective tax
rate. Effective tax rate also increased y-o-y from 31.57% to 38.45% while other
income decreased 7% y-o-y and QoQ to Rs 20.2 bn. Depreciation was higher by 8%
y-o-y to Rs 5.36 bn.
Valuation
We believe that company is likely to continue to show strong performance in medium
to long term due to 1) strong domestic coal demand; 2) monopoly in coal production
in India; 3) ASP (Average selling price) significantly lower than global prices—
potential for price hikes 4) one of the lowest cost producers globally, and 5)strong
balance sheet. Stronger government at centre would expedite project clearances
and also the building of key rail projects; it would boost the volume for CIL in the
near term and bolster its long-term prospects. At CMP of Rs 344, stock is trading at
10.5x of its FY16E EPS. We maintain HOLD on the stock with target price of Rs. 422.

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