Coal India - Poor operational show; TP cut, maintain buy - Centrum

Coal India Ltd. (CIL) recorded poor operational performance (far lower than expectations) with EBITDA at Rs39.6bn (down 18% YoY, lower than est. by 17%) as blended realizations dropped 2.2% YoY and CoP increased 5% YoY due to higher contractual expenses and provisions. Lower other income and higher tax rate further depressed PAT to Rs37.3bn (lower by 16.5% YoY). The recently announced price hikes of 10% for coal with GCV of 2200-6100Kcal should support realizations going forward and we see volume growth supported by higher rake availability. We however, reduce our volume estimates for FY14E/15E to 480MT/504MT and lower our blended realizations by 1.6%/2.1%. We lower our EBITDA estimates by 10%/11.4% for FY14E/15E. Maintain buy with a reduced target price of Rs339.

Realizations surprise negatively: CIL's blended realizations stood at Rs1428/tonne for Q1FY14 (lower by 2.2% YoY, ~3% below expectations). Realizations for FSA coal stood at ~R1296/tonne, up 2.3% YoY but lower than expected as incremental sales were largely to power sector and price hikes taken at May end were not reflected for the full quarter. Realizations for e-auction coal dropped by 16.5%% YoY to Rs2140/tonne and the premium of e-auction coal over FSA coal fell to ~65% which was an unexpected negative surprise. Volumes were in-line at 115.4 MT (up 2% YoY) but lower than target by ~4%.

Hike in prices to support realizations going ahead: CIL announced price hikes of 10% for all grades of coal with GCV of 2200-6100 Kcal/Kg during the quarter and this is expected to support realizations going ahead for FSA and e-auction coal.

EBITDA margin falls: EBITDA stood at Rs39.6bn (~17% lower than our est.), lower by ~18% YoY and ~35% QoQ. EBITDA margin fell to 24%, lower by 520bps YoY on account of lower realizations and higher CoP (~5% YoY). EBITDA/tonne dropped to Rs343 (19% YoY).

Outlook strong, divestment overhang remains: CIL's future outlook remains strong due to recent price hikes and momentum in signing of FSAs at 65% domestic supply trigger. 79 new FSAs (ACQ of ~125 MT) have already been signed and quality issue with NTPC has been largely resolved. Recent price increase for FSA coal is expected to support realizations for both FSA as well as eauction coal. Railway rake availability continues to improve for CIL (~7% higher YoY in YTDFY14) and July dispatches have been ~6% higher than the target resulting in YTD shortfall of only 2.2% from 492 MT targeted in FY14E. We reduce our volume estimates for FY14E/15E to ~480MT/504MT and also cut our blended realizations by 1.6%/2.1% to factor in lower e-auction realizations and higher sales to power sector. We revise our EBITDA estimates downwards by 10%/11.4% for FY14E/15E.

Valuations: We remain positive on volume growth with strong domestic demand and better railway logistics. Timely increase in prices is a welcome positive. We find the stock trading at cheap valuations of FY14E adj. (adj for OBR provisioning) P/E of 8.5x and FY14E adj. EV/EBITDA of 4.1x. We cut our valuation multiple to 6x FY15E EV/EBITDA and reduce our target price to Rs339. Maintain 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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