Buy rating on Coal India: CIL revenues up by 4% at Rs 170 bn

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November 23, 2015 12:05 AM

Coal India's revenues were up on account of higher FSA and e-auction realisations and higher e-auction volumes

Higher realisations and OBR reversal drive Ebitda outperformance: Coal India’s Q2 revenues of Rs 170 bn (up 8% y-o-y) were 4% higher than our expectations on account of: (i) higher FSA and e-auction realisations; and (ii) higher e-auction volumes. This coupled with a reversal of the overburden removal provision of Rs 4.3 bn (as the actual strip ratio in Q2FY16 was at 2.2x, higher than the average of 1.8x for existing mines) resulted in Ebitda of Rs 28 bn (up 28% y-o-y), which was significantly higher than our estimate of Rs 13.5 bn. We highlight that Q2FY16 e-auction realisations were at Rs 1,788/t (8% above our estimate of Rs 1,650/t). We cut our FY16/17/18 EPS (earnings per share) estimates by 3%/7%/2% each, as we cut our e-auction realisation estimates by 5-7%; we also cut our e-auction volume estimate for FY17, as we factor in delay in auction on non-power linkages, which would be partially offset by 25% of incremental volumes being auctioned under non-power linkages. We cut our DCF-based (discounted cash flow) TP (target price) by 3% from Rs 425/share to Rs 410/share (22% upside). At CMP, the stock is trading at an FY17e P/E (price to earning ratio) of 13.2x vs the historical average of 12.7x.

Results overview: Coal India reported Q2 revenues of Rs 169.5 bn, up 8.2% YoY, as volume growth of 10.3% was partially offset by decline in blended realisation by 2%. Revenues were 4.4% above our estimate. Revenue outperformance coupled with reversal of the overburden removal provision of Rs 4.3 bn resulted in Ebitda of Rs 28 bn (up 28% y-o-y), which was significantly higher than our estimate of Rs 13.5 bn. Adjusted PAT was at Rs 25 bn, up 16% q-o-q and 36% above our estimate of Rs 18.7 bn, as the Ebitda outperformance was partially offset by lower-than-expected other income and provision of Rs 3.2 bn.

*  Higher FSA and e-auction realisations: FSA realisations were at Rs 1,294/t (up 3% y-o-y) and were 3% above our estimates. E-auction realisations were at Rs 1,788/t but 8% above our estimate of Rs 1,650/t.
* Higher e-auction sales: Overall offtake volume growth of 10.3% y-o-y was the highest in the last 17 quarters. E-auction volumes at 14.7mt were higher than our estimate of 13mt.
* Blended realisations: Higher FSA as well as e-auction realisations coupled with higher e-auction sales resulted in average blended realisation of Rs 1,392/t.
* Revenues: We highlight that the 28% y-o-y decline in e-auction realisations was largely offset by the 38% y-o-y increase in e-auction volumes, resulting in flattish e-auction revenues on a y-o-y basis.
* OBR reversal results in lower-than-expected costs: In Q2, four of CIL’s subsidiaries (ECL, BCCL, NCL and CCL) made an OBR (Over Burden Removal) provision reversal of Rs 4.3 bn. This was largely offset by OBR provision of Rs 4.7 bn made by the other three subsidiaries (MCL, SECL and WCL), resulting in a net OBR provision of Rs 0.4 bn vs our estimate of Rs 6 bn and Q2FY15 provision of Rs 5.5 bn. The management highlighted that the strip ratio in Q2 was at 2.2x vs 1.6x in Q2FY15 and the required average of 1.8x for existing mines, and hence a reversal had to be made. This is reflected by the fact that OBR growth for first half of fiscal 2016 was 37% vs production growth of 8%, and contractual expenses on a per tonne basis grew 25% y-o-y. The management highlighted that since production in second half of this fiscal is higher, the machinery is likely to be diverted towards higher production growth and hence, OBR growth in second half could be lower than first half.
* Ebitda up 28% y-o-y: Higher realisations coupled with OBR provision reversal resulted in Ebitda of R28 bn (up 27% y-o-y), significantly above our estimate of Rs 13.5 bn, and PAT of Rs 25 bn, up 16% q-o-q and 36% above our estimate of Rs 18.7 bn.


Where do we go from here? We factor in delay in non-power linkages: And now we factor them in as and when they expire. We also factor in 25% of incremental volumes to be sold under non-power linkages incrementally over FY17-20e. A combination of these results in a cut to our FY17 e-auction volumes estimates from 110mt in FY17 to 90mt now and increase in our FY18 e-auction estimates from 111mt to 124mt. We also cut our FY15-17 e-auction realisation estimates by 5-7% each over FY16-18e. As a result, we cut our blended realisation estimate for FY17 by 2%.

We remain positive on CIL’s volume growth trajectory, which is likely to drive stronger earnings growth. Key catalysts for the stock are: (i) sustained volume CAGR of ~9-10% over FY15-20e; (ii) better visibility over the next one year on partial completion of the three key railway lines is likely in the next two-three years; and (iii) progress towards auction of non-power linkages over the next six months.

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