Coal India - Realisations drive disappointment; Hold - Anand Rathi

Coal India's (CIL) realisations were weaker than expected due to lower demand for e-auction coal, while higher employee and repairs expenses led to earnings disappointment. The weaker demand scenario for higher priced e-auction coal in light of subdued global thermal coal prices and weaker balance sheet of thermal power producers will cap realisation growth. We reduce the target to 6.5x EV/EBITDA with target price of Rs.356 from Rs.372 earlier, but upgrade the rating to Hold as price will be supported by dividend yield and balance sheet cash.

Realisations lower than expected. CIL's realisations, at Rs.1,432, grew only 2% yoy against the expectation of 4% as e-auction realisations were down 6% yoy to Rs.2,282 (revenue contribution of 18%). E-auction volumes were 11.5% of the total sales volume of 101mt (+9%yoi) which will taper down to sub 11% by 4QFY13e.

Volumes grow, but revenues modest. Despite the impressive volumes growth of 9% to 101.4mt, revenues grew only 11% to Rs.146bn. Also, maintaining high volumes growth will be challenging after the lower base wears off from November, leading to higher reliability on realisations for earnings.

Earnings also hit by higher expenses. Employee expenses grew at 15%YoY to Rs.65.4bn due to non executive wage settlements effected in 4QFY12. The repairs and OBR expenses also lowered the EBITDA/tn to Rs.282 and restricted PAT growth to 19%YoY at Rs.30.8bn.

Valuation. CIL is trading at 6.2x EV/EBITDA FY14e and dividend yield of 3% and cash per share of Rs.131 will support the valuations from hereon. Risks. Stronger than expected volume growth and higher global thermal coal prices.

Source : Equity Bulls

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