Stock performance expected to remain weak given earnings outcome and concerns on grade slippage
As Q4FY17 blended realisation at Rs 1,482/ton (+7% q-o-q, +4% y-y) was 1% above our forecast of Rs 1,466/ton, Coal India’s (CIL’s) Q4FY17 revenues at Rs 232 bn (+8% y-y), were +1%/+3% vs. our/consensus forecast. However, opex excluding overburden removal (OBR) provision at Rs 183 bn (+8% y-o-y) was 15% above our forecast and resulted in a sharp miss at pre-OB Ebitda (Rs 48.7 bn, -29% y-o-y and 29% below our forecast). Further, as OBR for the quarter at Rs 14.8 bn (+12% y-o-y) was 46% above our forecast, reported Ebitda at Rs 33.9 bn (-39% y-o-y) was 42%/33% below our/consensus forecast.
Depreciation at Rs 14.8 bn (+12% y-o-y) was also 15% above our forecast. The consequent Ebit miss was partially recouped by sharply higher other income at Rs 18.6 bn (+66% q-o-q, +5% y-o-y), which includes an Rs 3-4 bn write-back of liabilities; tax rate at 36.5% was in-line. All this led to PAT of Rs 27.2 bn (-38% y-o-y) coming in ~30% below our/consensus forecasts.
Negative surprise in Opex: (i) Employee cost at Rs 92.3 bn (+18% y-o-y) was 10% above our forecast; (ii) Miscellaneous expenses at Rs 22 bn (+56% y-o-y) were 62% above our forecast; (iii) Provisions/write-offs at Rs 12.7 bn (2.7x y-o-y) were more than double our forecast of Rs 5.3 bn on the back of Rs 10 bn provision towards grade slippage up to FY17 in cases where coal sampling results are yet to be made available.
FY17 financials: Revenues were Rs 783.6 bn (flat y-o-y), pre-OB Ebitda was Rs 149.1 bn (-31% y-o-y), Ebitda was Rs 122.4 bn (-35% y-o-y) and PAT was Rs 92.7 bn (-35% y-o-y). Revenues were 2% above our forecast, while pre-OB Ebitda/PAT were 11%-12% below forecast.
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Expect stock to remain muted
While CIL’s Q4FY17 revenue metrics were reasonable (3% q-o-q uptick in FSA realisation, higher e-auction sales volume), the sharp spike in opex, wherein there are seemingly no major one-offs, is a key concern. In addition, the anticipated risk (big EPS dent) emanating from recent grade revision exercise (in Apr-2017) is expected to keep the stock price under pressure.
We look forward to management commentary on coal demand, prospective impact of grade revision exercise, possibility of another round of FSA price hike and outlook on offtake and sales mix. Accordingly, we place our earnings forecasts/TP under review.
Maintain Neutral. On our FY19F normalised earnings (adding back OB removal adjustment to EPS and Ebitda), the stock trades at 11.2x P/E (EPS: Rs 24.0) and 6.8x EV/Ebitda (12.3x P/E and 7.2x EV/Ebitda on reported earnings).