Coal India - Volumes strong but e-auction realizations dip and fuel costs escalate - Centrum

Coal India's (CIL) operational performance was below our estimates with EBITDA at ~Rs28.6bn (our est. of Rs34.5bn) on account of sharp fall in e-auction realizations (down by ~11% QoQ and premium over raw FSA coal ) and higher fuel costs (up by ~9% QoQ). CIL continues to see improvement in sales volumes (up by 7% in H1FY13) with better railway rake availability (170 rakes/day in H1FY13, up by 10.4% YoY) and strong domestic demand. CIL announced changes to the new FSAs (80% qty trigger) with domestic/import supply split of 65%/15% and penalties below 65% domestic supply ranging from 5%-40% and imported coal to be supplied at cost plus basis. We see robust volume growth ahead but revise our realizations and EBITDA assumptions lower to account for lower e-auction prices and higher fuel costs. Recommend accumulate with a target price of Rs384.

Volumes remain firm but realizations dip on account of lower premium on eauction volumes: CIL's blended realizations stood at Rs1432/tonne, up by 2% YoY but lower by ~2% QoQ. FSA raw coal realizations remained firm at Rs1287/tonne but eauction coal realizations fell to Rs2282/tonne (lower by ~11% QoQ and down for second successive quarter on account of cheaper import option for buyers). Overall volumes went up by 8.5% YoY to ~102 MT and e-auction volumes stood at 11.7 MT (11.5% share).

EBITDA margin lower due to higher wage & fuel costs: EBITDA stood at Rs28.6bn with margin of 19.6% (Centrum est. 23.2%) as wage cost went up by 6.6% QoQ to Rs65.4bn and power & fuel costs also increased by ~9% QoQ due to diesel price hike. We expect wage cost for FY13E at Rs256bn.

FSA changes beneficial in the long run, outlook remains strong: CIL finalized its new FSAs (80% qty trigger) with domestic/import supply split of 65%/15% and penalties below 65% domestic supply ranging from 5%-40% and imports being supplied on a cost plus basis. Based on our calculations of FSA signing with ~24000MW of power capacity for FY13E, we do not foresee a shortfall of more than 5MT for 65% domestic supply trigger assuming 10MT of inventory sales, 15MT of diversion from existing FSA being supplied in excess of 90% trigger and 22MT additional production during FY13E. Also, eligibility of all power producers for FSA signing would depend on fulfilment of PPA and other conditions which might reduce the overall signing and quantity required to be supplied by CIL. We do not foresee any high risk of large shortfall from CIL and resultant penalties for FY14E also. We maintain our volume estimates but lower our EBITDA estimates for FY13E/14E by 2%/4.3% to account for lower e-auction realizations and higher fuel costs.

Valuations - Accumulate: We remain positive on the company as volumes are set to improve from FY13E onwards with strong domestic demand, pick up in new FSA signings, better railway logistics and higher production. We find the stock trading at reasonable valuations at FY14E adj. (adj for OBR provisioning) P/E of 10.9x and FY13E adj. EV/EBITDA of 6x. We value the company at 7x FY14E EV/EBITDA to arrive at a fair value of Rs383. Our DCF based fair value stands at Rs384. We recommend accumulate with a target price of Rs384 (average of our EV/EBITDA and DCF valuation fair values).

Key Risks: Higher penalties on new FSAs due to large shortfall in supply, coal price reduction, slowdown in production growth and lower railway rake availability.

Source : Equity Bulls

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