Coal India - Margins dip on lower e-auction volumes and higher fuel costs - Centrum

Coal India's (CIL) operational performance was below our estimates with EBITDA at ~Rs42.9bn on account of sharp fall in e-auction volumes (down by ~9% YoY ) and higher fuel costs (up by ~22% QoQ). CIL continued to see improvement in sales volumes (up by 8% in 9MFY13) with better railway rake availability (177 rakes/day in 9MFY13, up by 10.6% YoY) and strong domestic demand. Clarity on new FSAs remains low with price pooling for imported coal being suggested and the company has ruled out any near term proposal for increasing prices. We see robust volume growth ahead but revise our realizations and EBITDA assumptions lower to account for lower e-auction volumes, lower blended realizations and higher fuel costs. Downgrade to neutral with a target price of Rs372.

Volumes remain firm but lower on e-auction front: CIL's volumes remained firm at 120.5 MT (up ~9% YoY) but e-auction volumes dropped by 8.7% YoY to 10.5 MT. Total offtake for 9MFY13 was up by 8.1% YoY. Blended realizations stood at Rs1438/tonne, up by 3.3% YoY and QoQ. FSA raw coal realizations dropped by 3.8% QoQ to Rs1232/tonne but e-auction coal realizations increased to Rs2941/tonne (up by ~19% QoQ). Realizations and volumes increased on the washed coal front which was positive.

EBITDA margin lower due to higher wage & fuel costs: EBITDA stood at Rs42.9bn with margin of 24.8% as wage costs remained high and power & fuel costs went up by 22.4% QoQ to Rs6.8bn due to substantial increase in diesel prices. Margin is expected to remain subdued due to higher impact of diesel price increase going forward.

Outlook remains hazy due to lack of positive triggers: CIL has current 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 but price pooling could be made mandatory on this (visibility remains low as of now) which would lead to coal cost increase of 8-10% according to our calculations. Though the company has said it would not be affected adversely by the price pooling mechanism, market remains nervous about any subsidy provided by CIL to power producers. The company has also ruled out any price hikes in the near future to cover higher fuel and employee costs and this is a big negative. We maintain our volume estimates but lower EBITDA estimates for FY13E/14E by 8.2%/6.4% to account for lower e-auction volumes, lower prices and higher fuel costs.

Valuations: We remain positive on the volume growth front with strong domestic demand, pick up in new FSA signings, better railway logistics and higher production but see higher fuel costs and no price hikes as a big negative for the stock from earnings and margins point of view. We find the stock trading at reasonable valuations at FY14E adj. (adj for OBR provisioning) P/E of 11.5x and FY14E adj. EV/EBITDA of 6.5x. We value the company at 7x FY14E EV/EBITDA to arrive at a fair value of Rs368. Our DCF based fair value stands at Rs377. We downgrade to neutral with a target price of Rs372 (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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