Working on a realistic target of 1bn tonnes output by FY2020 June 01, 2015 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating Accumulate Price Rs391 Target Price Rs422 Implied Upside 7.9% Sensex 27,828 Nifty 8,434 (Prices as on May 29, 2015) Trading data Market Cap. (Rs bn) 2,470.0 Shares o/s (m) 6,316.4 3M Avg. Daily value (Rs m) 2499.6 Major shareholders Promoters 79.65% Foreign 8.99% Domestic Inst. 8.82% Public & Other 2.54% Stock Performance (%) 1M 6M 12M Absolute 5.4 10.2 4.7 Relative 3.2 13.2 (10.1) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 23.0 27.4 16.1 2017 29.2 30.6 4.3 Price Performance (RIC: COAL.BO, BB: COAL IN) (Rs) 450 400 350 300 250 200 150 100 50 0 May 14 Jul 14 Source: Bloomberg Sep 14 Nov 14 Jan 15 Mar 15 May 15 We attended the analyst meet of Coal India (COAL). Management sounded confident to achieve 11%/12% YoY growth in production/off take for FY16 on the back of improved rake availability and expedited clearance process. However, management also cautioned about weak demand from power sector and elevated inventory at power stations. CIL remains our top pick with a strong play on Govtled reform across the chain of its operations and attractive dividend yield at ~5%. We maintain our Accumulate rating with a PT of Rs422, EV/EBITDA of 7.5x FY17E. Not yet decided on price hike: Management highlighted that it is well aware of the fall in margins and earnings, experienced in past three consecutive quarters. To contain the same, COAL is looking to affect the price hike. However, management shared no timeline and quantum of price hike. Weak economic activity could hit the off take in FY16: Impacted by weak economic activity and elevated coal stocks (`29 30 days) at power stations, COAL is experiencing weakness in demand from power utilities sector (constitutes ~78% of COAL's total off take). COAL is targeting 12% YoY growth in volumes to power utilities in FY16 at 430m t against ~9% in FY15. Prepared roadmap to reach 1bn t by FY2020: COAL has identified various potential projects to achieve the stated production level by FY2020. So far, mines/projects to produce about 908m t in FY2020 (FY15: 495m t) has been identified and for balance to reach 1bn t is underway. COAL has expedited spending on procuring high capacity capital equipments, acquiring land and expanding rail connectivity to achieve the desired goal. Ongoing projects and future projects would contribute 428m t of total increase. While, existing projects would see reduction of output by 26m t. Contd...2 Key financials (Y/e March) 2014 2015 2016E 2017E Revenues. (Rs m) 688,100 720,146 777,667 885,657 Growth (%) 0.7 4.7 8.0 13.9 EBITDA (Rs m) 159,632 152,300 155,207 208,138 PAT (Rs m) 152,545 137,233 145,121 184,637 EPS (Rs) 24.2 21.7 23.0 29.2 Growth (%) (15.1) (10.0) 5.7 27.2 Net DPS (Rs) 29.0 20.7 15.8 20.1 Profitability & Valuation 2014 2015 2016E 2017E EBITDA margin (%) 23.2 21.1 20.0 23.5 RoE (%) 33.6 33.2 34.8 41.0 RoCE (%) 30.8 30.3 31.6 37.2 EV / sales (x) 2.8 2.7 2.4 2.0 EV / EBITDA (x) 12.0 12.6 12.0 8.6 PE (x) 16.2 18.0 17.0 13.4 P / BV (x) 5.8 6.1 5.7 5.3 Net dividend yield (%) 7.4 5.3 4.0 5.1 Source: Company Data; PL Research Analyst Meet Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Activity on three critical railway lines picked up: 1) Jharsuguda Barpali, Odisha: Execution at its fastest pace on the line among the 3 lines. Currently, track laying is under progress with the loading expected in FY17. Line would carry 60mtpa of coal 2) Bhupdevpur Korichapar, Chhattisgarh: Forest land acquired for first 65kms. Work on construction of bridges commenced. Commissioning of line on first 65kms is expected in FY17 18. Line has potential to carry 80mtpa of coal. 3) Tori Shivpur Kathotia, Jharkhand: Work on the link has expedited with the support of new state govt. However, commissioning would be delayed by 5 6 months from prior schedule of Mar 19. Line would carry 60mtpa of coal Rake loading up ~12% YoY: Thanks to better rail circuit management, enhanced efficiency and increased availability of rakes (due to weak demand from other sectors), loading of rakes/day rose 11.9% YoY In Apr May'15 to 207. COAL's overall off take target of 550m tonnes (t) for FY16 with growth of ~12% YoY, builds in rakes/day at 232 (FY15:195). Targeting capex of Rs110bn in FY16: COAL is looking to spend highest ever on capex in FY16 at Rs110bn, more than 2x capex in FY15. This would include 1) Rs60bn on sourcing of equipments and land acquisition, 2) Rs5bn for procurement of wagons, 3) Rs20bn on setting up solar power projects and 4) Rs25 30bn for investment in three rail lines, categorised under infrastructure projects. The entire capex would be financed through internal accruals. Consistently been successful in acquiring land: Against the requirement of 2000 hectares of land/year, COAL has been acquiring on an average 4500 hectares of land/year for past three years. This would help COAL to grow its production at a 5 year CAGR of 13% in FY15 FY20 to 908m tonnes. Escalation in cost due to increase in strip ratio: Management highlighted that COAL's strip ratio would increase to 2.7x by FY2020 against current 1.8x as operations approach deeper seams of coal. However, Chairman assured that application of appropriate technology would help COAL to restrict the escalation in cost on account of increase in strip ratio. Employee cost rose sharply due to actuarial valuation; likely to rise by 6% in FY16: Company provided Rs9.6bn for actuarial valuation of employee benefits due to 50bps cut in discount rates from 8.5% to 8.0%. Management expects employee cost to rise 6 7% in next couple of quarters after factoring 3.5% 4% reduction in employee headcount due to natural attrition. Pithead stocks up 13% YoY in May 15: Coal stocks at COAL's pithead rose to 49m tonnes at the end of May 15 due to weak demand from power utilities and steep increase in coal output. Supplies to new power plant to improve in FY16: COAL executed FSAs for 224m t of coal with power plants commissioned after Mar 2009 having requisite PPAs. As per the conditions of FSA agreement, COAL will supply 67% of the FSA quantity or 150m tonnes in FY16, up ~15% YoY. June 01, 2015 2
Exhibit 1: Q4FY14 Result Overview (Rs m) Y/e March Q4FY14 Q4FY13 YoY gr. (%) Q3FY14 FY15 FY14 YoY gr. (%) Net operating revenue 207,742 199,980 3.9 177,629 720,146 688,100 4.7 (Accretion)/Decretion in Stocks (13,504) (8,493) 59.0 (4,663) (5,305) 927 (672.6) Consumption of stores and spares 21,510 22,105 (2.7) 18,420 72,566 70,221 3.3 Employees' Remuneration & Benefits 80,341 70,027 14.7 74,914 298,588 277,694 7.5 Power & Fuel 6,095 5,729 6.4 6,089 23,473 22,822 2.9 Welfare expenses 1,142 2,389 (52.2) 728 4,054 7,348 (44.8) Repairs 4,123 3,884 6.2 2,620 11,232 9,852 14.0 Contractual Expenses 28,048 21,482 30.6 22,825 85,126 68,275 24.7 Other Expenses 9,306 7,514 23.8 8,204 29,909 26,919 11.1 Overburden Removal Adjustment 15,752 15,094 4.4 10,179 38,267 32,866 16.4 Provision and write off 934 409 3,513 9,938 2,781 257.4 Total Cost of Sales 153,748 140,139 9.7 142,829 567,847 519,704 9.3 EBITDA 53,995 59,840 (9.8) 34,800 152,300 168,396 (9.6) as a % of Sales 26.0 29.9 19.6 21.1 24.5 Depreciation 6,980 5,841 19.5 5,672 23,198 19,964 16.2 EBIT 47,015 54,000 (12.9) 29,128 129,102 148,432 (13.0) Interest 29 330 (91.2) 22 73 580 (87.4) PBT (before other income) 46,986 53,670 (12.5) 29,106 129,028 147,852 (12.7) Other Income 22,914 23,844 (3.9) 21,820 86,761 89,693 (3.3) PBT before extraordinaries 69,900 77,514 (9.8) 50,925 215,789 237,545 (9.2) Adj. pertaining to previous year 14 (8,498) (170) 50 (8,750) PBT after extraordinaries 69,914 69,016 1.3 50,756 215,839 228,795 (5.7) Provision for Taxation 27,529 24,674 11.6 18,131 78,573 77,679 1.2 Reported PAT 42,385 44,342 (4.4) 32,625 137,266 151,116 (9.2) Extraordinary items (net of tax exp) (Charge)/ Credit (0) (0) Net profit 42,385 44,342 (4.4) 32,625 137,266 151,115 (9.2) Adjusted PAT 42,376 49,951 (15.2) 32,737 137,233 156,892 (12.5) Source: Company Data, PL Research June 01, 2015 3
Exhibit 2: Operating Metrics Y/e March Q4FY14 Q4FY13 YoY gr. (%) Q3FY14 FY15 FY14 YoY gr. (%) Coal production (m tonnes) 151.9 143.2 6.0 131.6 494.2 462.4 6.9 Coal sales volume (m tonnes) 134.7 129.9 3.7 124.6 489.4 471.6 3.8 Rs/tonne analysis on aggregate volumes Net realisation 1,542 1,539 0.2 1,426 1,472 1,459 0.9 Total cost/tonne 1,141 1,078 5.8 1,147 1,160 1,102 5.3 EBITDA/tonne 401 461 (13.0) 279 311 357 (12.8) Sales volume mix (m tonnes) FSA 116.0 109.1 6.3 114.7 426.0 396.3 7.5 E auction 13.9 16.8 (17.0) 5.6 46.9 58.0 (19.1) Washed coal 3.2 3.0 6.9 3.0 12.0 12.9 (7.5) Realisation per tonne (Rs) FSA 1,419 1,408 0.8 1,298 1,327 1,314 1.1 E auction 2,386 2,139 11.5 3,134 2,450 2,182 12.3 Washed coal 1,971 2,545 (22.5) 2,620 2,348 2,351 (0.1) Source: Company Data, PL Research June 01, 2015 4
Income Statement (Rs m) Net Revenue 688,100 720,146 777,667 885,657 Raw Material Expenses 71,147 67,261 82,196 92,354 Gross Profit 616,953 652,886 695,471 793,303 Employee Cost 277,694 298,588 316,270 335,721 Other Expenses 179,627 201,998 223,994 249,444 EBITDA 159,632 152,300 155,207 208,138 Depr. & Amortization 19,964 23,198 24,085 26,692 Net Interest 580 73 79 90 Other Income 89,708 86,811 90,854 100,965 Profit before Tax 228,795 215,839 221,897 282,320 Total Tax 76,241 78,573 76,777 97,683 Profit after Tax 152,555 137,266 145,121 184,637 Ex Od items / Min. Int. 9 33 Adj. PAT 152,545 137,233 145,121 184,637 Avg. Shares O/S (m) 6,316.4 6,316.4 6,316.4 6,316.4 EPS (Rs.) 24.2 21.7 23.0 29.2 Cash Flow Abstract (Rs m) C/F from Operations 145,247 150,792 160,431 200,534 C/F from Investing 23,590 5,564 1,461 8,278 C/F from Financing (253,503) (157,358) (101,297) (140,170) Inc. / Dec. in Cash (84,665) (1,002) 60,594 68,642 Opening Cash 116,849 94,391 93,389 153,983 Closing Cash 94,391 93,389 153,983 222,625 FCFF 155,565 154,438 173,501 211,974 FCFE 144,290 153,438 172,723 211,974 Key Financial Metrics Growth Revenue (%) 0.7 4.7 8.0 13.9 EBITDA (%) (14.7) (4.6) 1.9 34.1 PAT (%) (15.1) (10.0) 5.7 27.2 EPS (%) (15.1) (10.0) 5.7 27.2 Profitability EBITDA Margin (%) 23.2 21.1 20.0 23.5 PAT Margin (%) 22.2 19.1 18.7 20.8 RoCE (%) 30.8 30.3 31.6 37.2 RoE (%) 33.6 33.2 34.8 41.0 Balance Sheet Net Debt : Equity (1.3) (1.4) (1.4) (1.4) Net Wrkng Cap. (days) (639) (675) (553) (514) Valuation PER (x) 16.2 18.0 17.0 13.4 P / B (x) 5.8 6.1 5.7 5.3 EV / EBITDA (x) 12.0 12.6 12.0 8.6 EV / Sales (x) 2.8 2.7 2.4 2.0 Earnings Quality Eff. Tax Rate 33.3 36.4 34.6 34.6 Other Inc / PBT 39.2 40.2 40.9 35.8 Eff. Depr. Rate (%) 4.9 5.1 4.7 4.8 FCFE / PAT 94.6 111.8 119.0 114.8 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 424,045 403,076 432,100 469,028 Total Debt 1,778 778 Other Liabilities 35,925 39,686 43,654 48,032 Total Liabilities 461,748 443,540 475,754 517,060 Net Fixed Assets 191,002 214,781 242,808 268,375 Goodwill Investments 11,876 11,876 11,876 11,876 Net Current Assets 239,153 197,166 201,353 217,091 Cash & Equivalents 549,769 548,766 609,360 678,002 Other Current Assets 270,060 278,818 292,683 312,678 Current Liabilities 580,675 630,418 700,690 773,589 Other Assets 19,717 19,717 19,717 19,717 Total Assets 461,748 443,540 475,754 517,060 Quarterly Financials (Rs m) Y/e March Q1FY15 Q2FY15 Q3FY15 Q4FY15 Net Revenue 177,995 156,780 177,629 207,742 EBITDA 42,810 20,696 34,800 53,995 % of revenue 24.1 13.2 19.6 26.0 Depr. & Amortization 5,183 5,363 5,672 6,980 Net Interest (21,794) (20,211) (21,798) (22,885) Other Income 21,805 20,221 21,820 22,914 Profit before Tax 59,578 35,591 50,756 69,914 Total Tax 19,246 13,668 18,131 27,529 Profit after Tax 40,332 21,924 32,625 42,386 Adj. PAT 40,228 21,892 32,737 42,376 Key Operating Metrics Raw coal prod (mn tn) 462 494 528 565 Coal despatches (mn tn) 471 489 528 565 Vol sold under FSA/MoU (mn tn) 396 426 453 485 Vol sold under E auction (mn tn) 58 47 58 62 Beneficiated coal vol (mn tn) 13 12 13 13 Vol sold to power utilities (mn tn) 355 400 Real. / tonne (Rs) 1,461 1,472 1,473 1,568 Total cost per tonne (Rs) 1,081 1,161 1,162 1,179 Cash cost per tonne (Rs) 993 1,062 1,063 1,075 Employee cost / tonne (Rs) 604 604 604 599 EBITDA / tonne (Rs) 339 311 294 368 OBR adj / tonne (Rs) 71 78 78 82 Source: Company Data, PL Research. June 01, 2015 5
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