A leaner product mix stemming from diversion of e-auction coal is a risk to margin
Coal India’s Q2FY15 Ebitda at R20.7 bn (down 26% year-on-year) missed our R26.7 bn estimate owing to higher-than-expected costs, partially cushioned by better blended realisation of R1,419/tonne. Sales volume at 111mt (flat y-o-y) was marginally below estimate, but e-auction volumes at 10.6mt (down 17.5% y-o-y) surprised positively.
Lower-than-expected other income and higher tax rate further dented profit after tax, which came in at R21.9 bn (down 28% y-o-y, 23% below estimate). While we have revised down FY15e PAT to 5%, we maintain our FY16 PAT estimate. High net cash (R98/share) and potential dividend yield (7-8%) are key positives for the stock. However, sluggish volume growth and lack of visibility on price hike imply forward earnings growth of only 3-4% p.a. Maintain ‘Hold’ with a target price of R360.
Revenue broadly in line: CIL’s revenue at R156.8 bn (up 2% y-o-y, down 12% q-o-q) was in line. Sales volume at 111 mt (flat y-o-y, down 8% q-o-q) was marginally lower than estimated 113mt. However, blended realisation at R1,419/t (flat y-o-y, down 5% q-o-q) was 3% above estimate.
High costs spoil the show: Ebitda (earnings before interest, taxes, depreciation, and amortisation) at R20.7 bn (down 52% q-o-q) missed R26.7 bn estimate owing to higher costs. CIL reported 5% higher-than-expected total operating costs led by higher cost of goods sold, employee costs and write offs. Lower other income (6% below estimate) and higher tax rate (5% above estimate) further affected PAT, which (down 46% q-o-q) was 23% below estimate.
Outlook and valuation: Upside capped; maintain Hold. CIL continues to lag its volume targets and for April-October 2014, despatches grew mere ~4%. Accordingly, we have revised down FY15/FY16 volume assumption of 500/535mt to 490/525mt, respectively. A leaner product mix due to diversion of e-auction coal to FSA customers is also a risk to margin, but this is partly compensated by a sharp jump in
e-auction prices. Overall, we have revised down FY15e PAT 5%, while broadly retained FY16 estimate. We maintain Hold with a target price of R360 (based on 14x FY16e P/E). At CMP (current market price), the stock trades at 13.4x FY16e EPS .
- Contractual expenses rose 17% y-o-y due to full impact of diesel price hike taken in FY14. In addition, there was an impact to the extent of R1 bn as outsourced labour wage rose and R0.85 bn on account of composite volume (production volume + overburden volume) increase of 3% y-o-y.
- Employee expenses rose 5% y-o-y as ex-gratia payment was increased to R40k/person from R31.5k/person. Hence, there was higher provisioning in Q2FY15 than in Q2FY14 of R1.5-1.6 bn.
- Tax rate: Eastern Coalfields has started paying tax, having wiped out accumulated losses, at high tax rate of 38%. This should normalise to 34% on a yearly basis.
- Coal despatches to power sector rose by 9mt y-o-y in H1FY15.