Coal India - Price hikes announced; upgrade to buy - Centrum

Coal India Ltd. (CIL) recorded robust performance (better than expectations) in Q4FY12 with EBITDA at Rs61.2bn (up 61% YoY) as FSA linked coal realizations went up by 2.6% YoY (excluding year end incentives) and volumes were robust at 130MT, up by 5.8% YoY. Adjusted for higher than expected yearly incentives of Rs13bn, EBITDA was largely in line but positively impacted by lower overall costs. Coal India announced price hikes of 10% for coal with GCV of 2200-6100Kcal and reduced prices for higher grade coal thereby garnering additional revenues of ~Rs25bn p.a. We see robust volumes and higher FSA realizations as key positives in addition to higher dividend payout. We maintain our volume estimates for FY14E at ~485MT but revise our realization upwards for FSA coal and raise our EBITDA estimates by 8.1% for FY14E. Upgrade to Buy with a target price of Rs386.

Realizations and incentives surprise positively: CIL's blended realizations (including Rs13bn of year end incentives) stood at Rs1532/tonne for Q4FY12 and Rs1468 for FY13 (up by 1.9% YoY). Excluding incentives, Q4 blended realizations for FSA coal stood at ~R1284/tonne, up by 2.6% YoY and 4.2% QoQ. Realizations for e-auction coal dropped by 21% QoQ to Rs2308/tonne and the premium of eauction coal over FSA coal fell to ~80%.

Hike in prices more than expected: CIL has announced price hikes of 10% for all grades of coal with GCV of 2200-6100 Kcal/Kg and this has come as a positive surprise and was above expectations. CIL has also reduced prices of high grade coal (above 6100 GCV) by 12% but is expected to witness blended realizations increase of ~4.7% on account of price hikes.

EBITDA margin jumps: EBITDA stood at Rs61.2bn for Q4 aided by Rs13bn in incentives and lower expenses on OBR and power & fuel. Adj. for incentives, EBITDA stood at ~Rs48.2bn (~2% higher than our est. of Rs47.2bn). FY13 Adj. EBITDA (adjusted for non cash OBR provisioning) stood at ~Rs212.8bn (up by 9.9% YoY) and adj. EBITDA margin was 31.2%. Overall expenses remained flat YoY due to lower OBR expenses compensating for higher fuel and mining costs.

Outlook improves with clarity on FSA and pricing: CIL's outlook has improved with clarity emerging on 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. 62 new FSAs have already been signed and only quality issue with NTPC which has resulted in payments delay of ~Rs25bn has been pending. Price pooling for imported coal has been ruled out for now and price increase for FSA coal is a timely positive trigger. Railway rake availability continues to improve for CIL with 186 rakes/day for FY13 (up by ~11%YoY). We maintain our volume estimates for FY14E at ~485MT but raise our realization for FSA coal and revise our EBITDA estimates upwards by 8.1% for FY14E.

Valuations: We remain positive on the volume growth front with strong domestic demand and better railway logistics. Timely increase in prices is a welcome positive. We find the stock trading at reasonable valuations at FY14E adj. (adj for OBR provisioning) P/E of 10.1x and FY14E adj. EV/EBITDA of 5.7x. We value the company at 6.5x FY15E EV/EBITDA to arrive at a fair value of Rs386. Upgrade to Buy.

Key risks: Lower volumes due to adverse monsoons, higher penalties on new FSAs due to large shortfall in supply, impact of mining tax levy from the new mining bill.

Source : Equity Bulls

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