'Hold' rating for Coal India, reduction in realisations: Jefferies

Posted online: Monday, Nov 25, 2013 at 0000 hrs
Net profit was 13% below estimate on weaker than expected FSA (fuel sale agreement) realisations. While Coal India has managed to address volume growth concerns with a 7.3% year-on-year offtake growth, its ability to take price hikes for power consumers remains a challenge. Valuations will remain under pressure on subdued earnings, government stake sale overhang and weak international prices although a large dividend payout and/or buy-back might prove to be a catalyst for the stock. Maintain Hold.

Weak results once again; Net profit misses estimates by 13% at Rs 30.5bn: Revenues at R154.1 bn (+6% y-o-y, -6% q-o-q) were 3% below expectation on weaker than expected FSA realisations. While costs were inline with estimates and grew 8% y-o-y however, stores & spares and repair expenses increased sharply which was offset by lower overburden removal (OBR) provision. Consequently Ebitda declined 2% y-o-y to R27.9bn ( -15% Jef. Est.)

Coal India

Average realisation down 1.1% q-o-q and 1.5% y-o-y: Average realisation was R1,416/ MT in Q2FY14, down 1.5% y-o-y driven by a 14% decline in e-auction realisation and a flat FSA realisation. FSA realisation was R1,262/MT, flat y-o-y despite the May-13 average price hike of ~4.7% which implies possible grade slippage for CIL during the quarter. E-auction realisation improved 4% q-o-q (quarter on quarter) on better demand and weaker rupee to R2,220/MT.

Off-take grew 7.3% y-o-y to 109.1 million tonne; production growth at 9.6% y-o-y: Helped by a favourable monsoon pattern and fewer mining disruptions, coal production in Q2FY14 increased 9.6% y-o-y to 97.6mt while off-take increased 7.3% y-o-y to 109.1mt. For CIL to achieve its FY14 offtake target of 492mt (+5.8% y-o-y), the offtake growth implied for the remaining period is 9.6% y-o-y, which is not going to be easy. E-auction volumes surprised positively, growing 25% y-o-y to 12.9 mt.

Ebitda/t declined 9% y-o-y to R256/t: Ebitda/t declined 9% on y-o-y basis to R256/t in the quarter despite a 7.3% off-take growth due to (i) a 1.5% y-o-y decline in realisations; (ii) higher stores and spares; (iii) higher repair expenses; (iv) higher contractual expenses on recent price increases; and (v) higher diesel costs; partly offset by a sharp decline in OBR provision. Excluding OBR adjustment, Ebitda/t declined by a higher 14% y-o-y to R299/t. Total operating costs were flat y-o-y at R1,156/t but excluding the non-cash OBR provision, the total per tonne costs were up 2% y-o-y.

Valuation/risks: We maintain our Hold rating with a target price of R294. We also revise our earnings per share estimates by -3.2% in FY14 and -3.6% in FY15 to factor in lower realisations and lower OBR provisions. Upside risk is higher-than-expected increase in notified prices. Downside risk is diversion of e-auction coal to power consumers.

The stock has seen a sharp correction YTD (year-to-date) of 21% on concerns of government stake sale and falling international prices. With (i) continuing weak demand and prices of e-auction coal due to both weak macro activity and falling international coal prices; (ii) lack of clarity on the impact of the joint third-party sampling of coal; and (iii) uncertainty over the timing of another price hike in an election year required in order to maintain a flat Ebitda/t given the recent cost increases; will keep the valuations subdued for some time. While we expect the stock to trade at our DCF (discounted cash flow) based valuation of R348 in the longer-term once all the above concerns are addressed, in the interim, we however, expect the valuations to remain subdued and maintain our price target based on a 6x FY15 EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation, and amortisation) multiple at Rs 294.