Post analyst meeting, we trim our FY18-19 EPS by 3%/2.7%. We believe grade reset, mix shift towards higher FSA sales and lower incentives, could weigh on CIL’s realisation. Wage provision may rise further. CIL may consider price hike in select segments (non power) to cushion earnings, but this may not be enough to fully offset grade reset impact. While earnings outlook appears unexciting, strong dividend yield potential may offer downside support. Retain Hold. Management stated that grade reset impact was largely reflected in Q4. Further drop in underlying FSA realisation is unlikely. Management believes that the recent grade reset is conservative. Final sale price (based on realised grade) may surprise positively as actual grade at its mines could be better than declared grades. CIL expects mix of FSA sales, lower ASP, to rise and incentive income, 1% of rev) to fall due to new linkage policy, which could impact ASP.
Adjusting for grade slippage provision in Q4, we estimate underlying FSA realisation was rs 1,240-1,258/tonne vs. reported FSA ASP of Rs 1,316 /tonne in Q4. Thus FSA ASP could potentially fall by 4.5% q-o-q in Q1, even if we assume no further impact of grade reset. CIL hinted at possibility of price hikes in selective segments to cushion impact of realisation. Price hike in power segment appears unlikely. CIL may consider price hike in non power segment, only 9 million tonnes in FY17.
CIL expects take volume of 600 m tonnes in FY18. We think this is optimistic. We forecast offtake volume of 581 million tonnes, 7% y-o-y in FY18E.
Wage negotiations are still on, but CIL expects wage revision provision to be around `30 billion on an annual basis, Rs 21 billion provided in FY17. We believe there could be further increase in wage provision as negotiations progress. There could be one off gratuity provision of `40 billion in FY18, as per CIL. CIL expects non cash over burden (OBR) provision to fall steadily as normative stripping ratio at mines could be revised lower. Lower OBR provision could boost reported profits, but it would also increase cash taxes (hits DCF).
Our revised DCF-based PT is Rs 276 (Rs 281 earler). Upside risks: more price hikes, higher e-auction prices; Downside risks: lower volume, lower ASP and higher wage costs.