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Buy rating on Coal India Limited in Q1: Fall in realisations offset by lower costs: Jefferies

Continuation of overburden removal charges despite shift to Ind AS led to profit miss

By: | Updated: September 17, 2016 7:07 AM
Fuel-supply agreement (FSA) realisation declined q-o-q despite recent price hike, likely due to adverse grade mix. E-auction prices were down q-o-q, but were higher than our estimate. (Source: PTI)

Q1 profit after tax declined 19% y-o-y, 4% below our estimate. Ebitda ex overburden removal (OBR) was marginally higher as lower than expected realisation was offset by lower costs. Continuation of OBR charges despite shift to Ind AS led to the profit miss.

Fuel-supply agreement (FSA) realisation declined q-o-q despite recent price hike, likely due to adverse grade mix. E-auction prices were down q-o-q, but were higher than our estimate.

Realisations disappoint due to lower FSA ASP: Ebitda pre OBR was R44.9 bn. Q1 production was up 2.8% and offtake was up 2.1% y-o-y. Average realisation declined 3% q-o-q to Rs 1,240/ton.

FSA realisation declined 4% q-o-q, which was surprising given 6.3% FSA price hike end May. This may be due to adverse grade mix. 53% of Q1 production came from MCL, SECL, which produce lower grade coal. E-auction realisations declined 5% q-o-q to Rs 1,570/ton, though this was 6% ahead of our estimate.

E-auction mix was higher at 15.4%. We forecast FSA realisation of Rs 1,368 /ton and e-auction ASP of Rs 1,560/ton in FY17e.

Cost ex OBR surprise positively: Costs ex OBR were Rs 1,054/ton, below our est Rs 1,114/ ton. Wage costs and contractual costs were slightly higher than estimate but this was offset by sharp decline in social costs and lower provision expenses.

CIL continued to report non cash overburden provision on its P&L despite shift to Ind AS, which was surprising given that CIL had indicated that there would be no overburden removal provision post transition to Ind AS.

We had removed OBR provision from our estimates post Q4 results.CIL is the world’s largest coal producer with estimated reserves of 64.2 bn tonne (JORC code) and 66.7 bn tonne (ISP guidelines). It accounts for ~80% of all India coal production and produced 431.3 and 435.8 million tonne in FY11 and FY12. It was conferred the ‘Maharatna’ status by the government in April-2011.

 

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