Coal India - New fuel supply pacts to dent profit - Edelweiss

Coal India (CIL) is expected to sign new fuel-supply agreements (FSAs) aggregating to 252mt of coal demand by August 31, of which FSAs equivalent to 131mt of coal have been already signed. Contrary to management guidance of no penalty and marginal loss in incentive, we estimate a hit of INR4.2bn/INR14.5bn in FY14/FY15, respectively. Ergo, we cut our FY15E EBITDA and PAT by ~10% each and our target price from INR383 to INR320. Nevertheless, we see positives of high dividend yield of ~5.5%, cash-rich balance sheet (~40% of market cap) and low cash cost. Maintain 'BUY'.

New FSAs to lead to incentive loss, penalty

We estimate total coal demand of 103mt and 211mt under new FSAs in FY14 and FY15, respectively. Based on this and our sales volume assumptions of 482mt and 508mt for FY14 and FY15, respectively, we estimate a total hit of INR4.2bn and INR14.5bn (pretax) in these years due to penalty and loss of incentive. For FY15E, we see complete loss of current incentive of INR13.0bn and a penalty of INR1.5bn.

Slashing FY14 cash estimate owing to higher receivables

Receivables for Q1FY14 have risen to ~INR127bn from ~INR105bn at FY13 end. With uncertainty on resolution of this issue, we increase our FY14 receivable assumption and reduce our FY14E end cash from INR696bn to INR649bn. While we have not considered a write-off in our estimates, the reduced cash captures the impact.

Outlook and valuations: New FSA woes; maintain 'BUY'

Our FY14E and FY15E EBITDA reduces by ~10% each, while PAT declines by ~8% and ~10%, respectively, led by incentive loss, penalty and lower other income. Hence, we cut our TP from INR383 to INR321. We switch our valuation methodology from DCF to P/E basis (12x FY15E P/E) to better capture the near-term earnings impact. Our target multiple of 12x is reasonable considering CIL's utility-like business, low cash cost and cash-rich balance sheet. At CMP, the stock trades at an attractive valuation of 9.5x FY15E P/E. With correction in the stock, we maintain 'BUY/Sector Performer'.

Source : Equity Bulls

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