Coal India Ltd. Result Update

Key Highlights

·         CIL’s consolidated net sales grew 2.5% YoY to `199.0bn primarily on account of a 5.7% YoY growth in sales volume to 129.9mn tonnes. Production declined 0.9% YoY to 143.3mn tonnes. E-Auction coal realisations declined 19.1% YoY to `2308 per tonne while FSA sales realisation grew 3.3% to `1273 per tonne. Beneficiated non-coking coal sales volume declined 41.6% YoY to 2.95mn tonnes. E-auction sales volume grew 1.2% YoY to 14.9mn tonnes.

·         CIL’s consolidated adjusted EBITDA declined 2.6% YoY to `61.2bn, down 2.6% YoY on account of higher contractual expenses and employee costs. EBITDA margin declined ~163bps YoY to 30.7%.

·         CIL’s consolidated adjusted PAT declined 5.7% YoY to `54.0bn on account of lower non-operating income at `22.1bn, down 5.2% YoY, higher depreciation and higher tax rate at 31.2%, up 114bps YoY.

Outlook and Valuations

·         Deferring the incorporating of the proposed 26% profit sharing clause in the MMDR bill to FY15E from FY14E: Given the delay in the MMDR (Mines and Minerals Development & Regulation) Bill, we further postpone the impact of the 26% profit sharing mining clause to FY15E from FY14E. Recently, the Parliamentary Standing Committee on coal and steel has recommended dropping the 26% profit sharing in mining clause and replacing it with an additional royalty equivalent to the regular royalty paid, to compensate people affected by coal projects. The Ministry of Mines, in response, has constituted a five member committee chaired by the Special Secretary of Mines to look into the matter. If the 26% profit sharing provision is changed into an additional royalty to be paid by coal mining companies, which would be a pass-through for CIL as per its pricing formula, there would major upside for Coal India, other things remaining the same. In the event of the above materialising, our target price would increase by 23.0%. However, on a conservative basis, we model for 26% profit sharing from FY15E onwards.

·         Price hikes likely to just maintain profitability in FY14E: Post the Q4FY13 results, CIL has announced price hikes on lower grade coal (below GCV of 5800/kg) by 10-11% and lowered prices of higher grade coal (above GCV of 5800/kg) by 10-11%. On a net basis, this is expected to raise revenues by Rs21bn for FY14 and Rs25bn on an annualised basis. However, increase in costs, particularly employee expenses and contractual expenses, would offset the benefits from the price rise. CIL is likely to just about maintain FY14E profitability at FY13 levels. On account of coal pricing adjustments (below our expectations due to reduction in higher grade coal prices), higher costs and lower non- operating income, we reduce our adjusted FY14E EPS by 9.5% to `27.4

 

Valuations; scrapping of the 26% profit sharing in mining clause could provide big upside: With the revision of our earnings estimates downwards, reduction in higher grade coal prices and quarterly rollover of our 1 year forward DCF value, our 1 year target price decreases by 7.5% to `370 from `400 earlier.