Coal India (COAL IN) Rating: HOLD CMP: Rs248 TP: Rs270 December 26, 2018 Company Report Change in Estimates Target Reco Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating HOLD BUY Target Price 270 330 Sales (Rs. m) 962,283 1,005,608 976,815 1,037,971 % Chng. (1.5) (3.1) EBITDA (Rs. m) 265,361 275,320 275,814 298,756 % Chng. (3.8) (7.8) EPS (Rs.) 24.4 24.7 26.1 27.5 % Chng. (6.7) (10.0) Key Financials FY17 FY18 FY19E FY20E Sales (Rs. bn) 784 859 962 1,006 EBITDA (Rs.bn) 151 129 265 275 Margin (%) 19.3 15.1 27.6 27.4 PAT (Rs. bn) 90 67 151 154 EPS (Rs.) 14.5 10.8 24.4 24.7 Gr. (%) (35.1) (25.6) 126.5 1.4 DPS (Rs.) 19.9 16.5 14.5 16.0 Yield (%) 8.0 6.6 5.8 6.4 RoE (%) 30.3 30.1 68.8 59.4 RoCE (%) 30.0 26.6 83.8 72.5 EV/Sales (x) 1.6 1.4 1.3 1.2 EV/EBITDA (x) 8.3 9.6 4.6 4.3 PE (x) 17.2 23.1 10.2 10.0 P/BV (x) 6.3 7.8 6.4 5.6 Key Data COAL.BO COAL IN 52-W High / Low Rs.317 / Rs.228 Sensex / Nifty 35,470 / 10,664 Market Cap Rs.1,541bn/ $ 22,010m Shares Outstanding 6,207m 3M Avg. Daily Value Rs.3266.76m Shareholding Pattern (%) Promoter s 78.32 Foreign 5.68 Domestic Institution 13.02 Public & Others 2.98 Promoter Pledge (Rs bn) - Stock Performance (%) 1M 6M 12M Absolute (3.3) (6.2) (6.6) Relative (4.6) (5.7) (10.6) Kamlesh Bagmar kamleshbagmar@plindia.com 91-22-66322237 Amit Khimesra amitkhimesra@plindia.com 91-22-66322244 Downgrade to Hold on poor operational performance Coal India (COAL) FYTD Volume growth slowed to 5.5% while, the growth in August--December 18 was mere 1% despite severe shortage of coal, led by improved demand from Power sector and pick-up in economic activity. Overall volumes growth would remain weak for rest of FY19e and FY20e due to poor rail connectivity at newly commissioned mines and peaked out Road/Belt route. We factor in 4.8%/5.5% growth in FY19e/FY20e. As happened in the past, margin rich E-auction volumes faced the brunt to meet the volumes tied-up in Power and Non-power FSAs. E-auction volumes/month fell by ~65% in Oct-Dec 18 to 2mn tonnes (t) against average 6mn t. Given the limited buffer for E-auction due to strong demand in FSA and low production growth, we expect E-auction volumes to fall to 4-year low at 65mn/60mn t in FY19-FY20e. Led by weak operational performance and rising headwinds due to Govt policy on opening up the sector. We trim our multiple by 9% to 10xFY20e P/E and downgrade the stock to HOLD with TP of Rs270 (Rs330 earlier). Rich dividend yield on depressed earnings: Impacted by grade slippages, wage revision and elevated capex, COAL s FCFE grew at a tepid CAGR of 2.5% over FY14-FY18 less than half of growth in volumes. We expect FCFE growth to languish between 2.0-2.2% in FY19e-FY21e due to stable earnings growth and high capex intensity with investments in non-core businesses like Fertilizer and Power Plant. Investors would start getting nervous in FY21e for the next wage revision due in July-2021. Hence, we believe that high dividend high is just a mirage built on weak earnings base. Opening up of the coal sector to gather pace: Given the poor show by COAL, we strongly believe that Govt of India would take decisive action by allowing the merchant mining and auction of more coal blocks for power and non-power sector. Admittedly, it is a time-consuming policy enabler; but it would pose a strong challenge to monopolistic stature of COAL s operations. Non-power FSAs and E-auction business would face the headwind due to poor quality of service and high prices. Prices in Power FSAs would rise at slow pace due to highly sensitive customer base and nature of contracts. Cut in TP led by earnings downgrade and valuation derating: Driven by cut in overall volume growth and E-auction volume estimates, we cut our EPS estimates by 7%/10% for FY19e/FY20e. Given the unimpressive earnings outlook, capital misallocation and visible policy headwinds, we trim our P/E multiple by 9% to 10.0x FY20e. Hence, we downgrade the stock to HOLD with revised TP of Rs270 (earlier Rs330). December 26, 2018
(Rs bn) (mn tonnes) Exhibit 1: COAL s offtake growth expected below 6% 700 650 600 550 500 450 Raw coal despatches % Change (RHS) 9.2 7.4 641 6.8 608 580 5.5 3.8 4.8 543 534 1.4 489 1.6 464 471 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Exhibit 2: E-auction sacrificed to meet the FSA commitments (m tonnes) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Volume-LHS Realisation/t Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 (Rs) Source: Industry, PL Exhibit 3: FCFE grew at a CAGR of 2.5% in FY14-FY18 160.0 155.6 150.0 149.5 140.0 130.0 133.7 130.4 136.2 125.7 140.2 120.0 120.2 110.0 December 26, 2018 2
Exhibit 4: Cash levels halved in 5 years at FY18 end 650 600 619 550 500 (Rs bn) 450 400 350 300 301 322 346 250 Exhibit 5: Dividend per share flattened out due to falling cash flows 30.0 28.0 26.0 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 29.0 27.4 20.7 19.9 16.5 16.0 14.0 14.5 December 26, 2018 3
Financials Income Statement (Rs m) Net Revenues 784,187 858,624 962,283 1,005,608 YoY gr. (%) 0.5 9.5 12.1 4.5 Cost of Goods Sold 57,253 85,090 76,126 82,712 Gross Profit 726,935 773,534 886,157 922,896 Margin (%) 92.7 90.1 92.1 91.8 Employee Cost 335,143 426,336 376,593 377,949 Other Expenses 215,109 192,789 216,153 239,151 EBITDA 151,102 129,245 265,361 275,320 YoY gr. (%) (29.8) (14.5) 105.3 3.8 Margin (%) 19.3 15.1 27.6 27.4 Depreciation and Amortization 55,790 64,246 68,103 76,603 Balance Sheet Abstract (Rs m) Non-Current Assets Gross Block 294,279 360,723 442,027 523,841 Tangibles 294,279 360,723 442,027 523,841 Intangibles - - - - Acc: Dep / Amortization 56,165 84,949 117,059 155,693 Tangibles 56,165 84,949 117,059 155,693 Intangibles - - - - Net fixed assets 238,114 275,774 324,968 368,148 Tangibles 238,114 275,774 324,968 368,148 Intangibles - - - - EBIT 95,313 64,999 197,258 198,717 Margin (%) 12.2 7.6 20.5 19.8 Net Interest 4,117 4,318 3,000 3,001 Other Income 53,242 46,583 46,118 48,026 Capital Work In Progress 85,852 102,864 111,898 120,988 Goodwill - - - - Non-Current Investments 105,270 129,132 129,132 129,132 Net Deferred tax assets 27,328 53,551 53,551 53,551 Other Non-Current Assets 22,390 25,454 26,454 27,454 Profit Before Tax 144,437 107,264 240,375 243,742 Margin (%) 18.4 12.5 25.0 24.2 Total Tax 51,735 38,081 88,939 90,184 Effective tax rate (%) 35.8 35.5 37.0 37.0 Profit after tax 92,703 69,184 151,436 153,557 Minority interest - - - - Share Profit from Associate - - - - Adjusted PAT 89,839 66,861 151,436 153,557 YoY gr. (%) (36.2) (25.6) 126.5 1.4 Margin (%) 11.5 7.8 15.7 15.3 Extra Ord. Income / (Exp) 2,864 2,323 - - Reported PAT 92,703 69,184 151,436 153,557 YoY gr. (%) (34.9) (25.4) 118.9 1.4 Margin (%) 11.8 8.1 15.7 15.3 Other Comprehensive Income - - - - Total Comprehensive Income 92,703 69,184 151,436 153,557 Equity Shares O/s (m) 6,207 6,207 6,207 6,207 EPS (Rs) 14.5 10.8 24.4 24.7 Current Assets Investments 5,135 2,056 2,056 2,056 Inventories 89,453 64,439 64,048 67,657 Trade receivables 124,763 86,892 73,773 76,939 Cash & Bank Balance 311,492 314,751 335,214 358,892 Other Current Assets 139,934 184,313 184,963 185,510 Total Assets 1,178,152 1,274,917 1,341,749 1,426,020 Equity Equity Share Capital 62,074 62,074 62,074 62,074 Other Equity 183,107 136,392 179,549 213,626 Total Networth 245,181 198,466 241,623 275,700 Non-Current Liabilities Long Term borrowings 3,015 10,612 15,377 15,377 Provisions 437,781 499,031 529,148 568,303 Other non current liabilities 38,197 43,666 46,666 49,666 Current Liabilities ST Debt / Current of LT Debt 27,130 4,765 - - Trade payables 38,843 45,169 50,348 54,704 Other current liabilities 374,119 457,948 442,784 446,208 Total Equity & Liabilities 1,178,152 1,274,917 1,341,749 1,426,020 December 26, 2018 4
Cash Flow (Rs m) Key Financial Metrics Year PBT 144,448 110,043 240,375 243,742 Per Share(Rs) Add. Depreciation 29,068 30,468 32,110 38,635 EPS 14.5 10.8 24.4 24.7 Add. Interest - - - - CEPS 23.5 21.1 35.4 37.1 Less Financial Other Income 53,242 46,583 46,118 48,026 BVPS 39.5 32.0 38.9 44.4 Add. Other 16,820 7,991 8,864 9,121 FCF 40.5 48.0 45.0 47.2 Op. profit before WC changes 190,336 148,502 281,349 291,497 DPS 19.9 16.5 14.5 16.0 Net Changes-WC 63,688 138,450 (3,460) 904 Return Ratio(%) Direct tax (89,415) (74,329) (88,939) (90,184) RoCE 30.0 26.6 83.8 72.5 Net cash from Op. activities 164,608 212,623 188,950 202,217 ROIC 12.8 10.1 19.8 19.3 Capital expenditures (86,761) (85,293) (90,338) (90,905) RoE 30.3 30.1 68.8 59.4 Interest / Dividend Income 34,642 24,044 27,130 28,847 Balance Sheet Others 56,666 (15,514) - - Net Debt : Equity (x) (1.2) (1.5) (1.3) (1.3) Net Cash from Invt. activities 4,546 (76,763) (63,208) (62,058) Net Working Capital (Days) 82 45 33 33 Issue of share cap. / premium (45,531) - - - Valuation(x) Debt changes 18,169 (14,778) - - PER 17.2 23.1 10.2 10.0 Dividend paid (151,031) (123,238) (108,279) (119,480) P/B 6.3 7.8 6.4 5.6 Interest paid (306) (370) - - P/CEPS 23.5 21.1 35.4 37.1 Others 2,720 2,513 3,000 3,000 EV/EBITDA 8.3 9.6 4.6 4.3 Net cash from Fin. activities (175,980) (135,873) (105,279) (116,480) EV/Sales 1.6 1.4 1.3 1.2 Net change in cash (6,825) (12) 20,463 23,679 Dividend Yield (%) 8.0 6.6 5.8 6.4 Free Cash Flow 251,370 297,916 279,288 293,122 Quarterly Financials (Rs m) Y/e Mar Q3FY18 Q4FY18 Q1FY19 Q2FY19 Net Revenue 216,433 269,092 242,609 221,981 YoY gr. (%) 5.7 15.8 26.6 22.3 Raw Material Expenses - - - - Gross Profit 216,433 269,092 242,609 221,981 Margin (%) 100.0 100.0 100.0 100.0 EBITDA 46,179 1,955 46,801 39,142 YoY gr. (%) 464.4 (95.8) 2,293.9 (16.4) Margin (%) 21.3 0.7 19.3 17.6 Depreciation / Depletion 7,511 9,308 7,452 8,069 EBIT 38,668 (7,353) 39,349 31,074 Margin (%) 17.9 (2.7) 16.2 14.0 Net Interest 974 1,127 1,103 8 Other Income 8,409 20,002 22,624 20,113 Profit before Tax 46,102 11,521 60,869 51,178 Margin (%) 21.3 4.3 25.1 23.1 Total Tax 16,052 (1,420) 23,025 20,317 Effective tax rate (%) 34.8 (12.3) 37.8 39.7 Profit after Tax 30,050 12,942 37,843 30,861 Minority interest (1) (1) (1) (2) Share Profit from Associates - - - - Adjusted PAT 30,050 12,942 37,843 30,861 YoY gr. (%) 4.2 (52.4) 60.9 733.2 Margin (%) 13.9 4.8 15.6 13.9 Extra Ord. Income / (Exp) 1 1 1 2 Reported PAT 30,051 12,943 37,845 30,863 YoY gr. (%) 4.2 (52.4) 60.9 734.2 Margin (%) 13.9 4.8 15.6 13.9 Other Comprehensive Income - - - - Total Comprehensive Income 30,051 12,943 37,845 30,863 Avg. Shares O/s (m) - - - - EPS (Rs) - - - - Key Operating Metrics Raw coal prod (mn tn) 554 567 608 641 Coal despatches (mn tn) 543 580 608 641 Vol sold under FSA/MoU (mn tn) 430 460 528 566 Vol sold under E-auction (mn tn) 94 106 65 60 Beneficiated coal vol (mn tn) 14 11 11 12 Vol sold to power utilities (mn tn) 426 453 Real. / tonne (Rs) 1,393 1,409 1,476 1,459 Total cost per tonne (Rs) 1,110 1,215 1,315 1,205 Cash cost per tonne (Rs) 1,057 1,166 1,257 1,146 Employee cost / tonne (Rs) 559 605 751 619 EBITDA / tonne (Rs) 229 165 377 370 OBR adj / tonne (Rs) 52 48 59 59 December 26, 2018 5
Price Chart Recommendation History (Rs) 350 321 293 264 236 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 No. Date Rating TP (Rs.) Share Price (Rs.) 1 09-Jan-18 BUY 365 288 2 10-Jan-18 BUY 365 304 3 12-Feb-18 BUY 365 300 4 13-Apr-18 BUY 365 285 5 29-May-18 BUY 340 282 6 01-Jun-18 BUY 340 295 7 10-Jul-18 BUY 340 261 8 13-Aug-18 BUY 340 279 9 05-Oct-18 BUY 340 273 10 12-Nov-18 BUY 330 264 Analyst Coverage Universe Sr. No. Company Name Rating TP (Rs) Share Price (Rs) 1 ACC BUY 1,710 1,540 2 Ambuja Cement Hold 210 201 3 Coal India BUY 330 264 4 Heidelberg Cement India BUY 200 130 5 Hindalco Industries Accumulate 308 252 6 Hindustan Zinc Accumulate 315 289 7 Jindal Steel & Power BUY 290 191 8 JK Lakshmi Cement Hold 359 298 9 JSW Steel BUY 450 353 10 NMDC Reduce 86 98 11 Shree Cement Hold 17,500 15,396 12 Steel Authority of India Hold 81 69 13 Tata Steel BUY 840 589 14 The Ramco Cements Hold 640 602 15 Ultratech Cement Hold 3,820 3,610 PL s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly December 26, 2018 6
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Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 www.plindia.com Bloomberg Research Page: PRLD <GO> December 26, 2018 7