Realisations drive the beat; E auction to surprise positively in H2 November 13, 2015 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating BUY Price Rs338 Target Price Rs405 Implied Upside 19.8% Sensex 25,611 Nifty 7,762 (Prices as on November 13, 2015) Trading data Market Cap. (Rs bn) 2,133.0 Shares o/s (m) 6,316.4 3M Avg. Daily value (Rs m) 1675.7 Major shareholders Promoters 79.65% Foreign 9.04% Domestic Inst. 8.44% Public & Other 2.87% Stock Performance (%) 1M 6M 12M Absolute (0.8) (8.5) (2.7) Relative 4.0 (3.8) 5.9 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 23.9 24.8 3.6 2017 28.7 28.3 1.3 Price Performance (RIC: COAL.BO, BB: COAL IN) (Rs) 500 400 300 200 100 0 Nov 14 Jan 15 Mar 15 Source: Bloomberg May 15 Jul 15 Sep 15 Nov 15 Coal India (COAL) reported Q2FY16 earnings above our expectation on the back of higher than expected realisations. COAL s stock price fell by ~24% in past one quarter against 9% fall in Nifty. We believe that the fall is primarily due to concerns associated with overhang on the proposed stake dilution by the GOI and weakness in the E auction segment. We do not think that GOI would divest the stake at the current depressed valuations, especially when significant improvements are seen in COAL s operational performance and efforts in place to achieve ~900m tonnes offtake target in 2020. On the E auction front, while the realisations have been lower on account of fall in global prices, it is offering higher quantities to offset the impact. H2FY16 would partially benefit from additional 14m tonnes allowed for sale to power sector and non power sector through E auction route. We have BUY rating on the stock with TP of Rs405, EV/EBITDA of 8x FY17E. Realisations ahead of expectation: Volumes rose 10% YoY at 122m (PLe:122m) tonnes (t). On the back of higher FSA realisations, realisations grew ahead of our expectation at Rs1390 (PLe: Rs1376), down 2% YoY. Realisations in FSA grew 2.7% YoY (down 1.8% QoQ) at Rs1294 (PLe:Rs1270). E auction volumes rose 39% YoY (down 8% QoQ) at 14.7mt (PLe:14mt). While, realisations fell 28% YoY/18% QoQ to Rs1,788 (PLe: Rs1,884)/t. Washed coal s volumes rose 13% YoY at 3.1m (PLe:3m) t with realisations at Rs2328 (PLe:Rs2250), down 5% YoY (+4.5% QoQ). Costs in line with expectation: Thanks to strong scale benefit and lower OBR cost, total cost/t fell 4% YoY at Rs1,187, in line with our expectation of Rs1186. Driven by higher than expected realisations, EBITDA came ahead of our expectation at Rs30.1bn (PLe:Rs28.5bn), up 17.7% YoY. Higher than expected other income and lower tax rate further expanded the beat on PAT level. PAT grew 15.5% YoY at Rs25.3bn (PLe: Rs23.9bn). Other income fell 7% YoY at Rs14.3bn (PLe:Rs14bn), primarily due to lower yields on treasury investments. Key financials (Y/e March) 2014 2015 2016E 2017E Revenues (Rs m) 706,075 741,201 791,620 897,194 Growth (%) 1.1 5.0 6.8 13.3 EBITDA (Rs m) 214,566 214,602 216,131 259,586 PAT (Rs m) 155,201 140,214 150,776 181,177 EPS (Rs) 24.6 22.2 23.9 28.7 Growth (%) (17.9) (9.7) 7.5 20.2 Net DPS (Rs) 29.0 20.7 17.0 18.0 Profitability & Valuation 2014 2015 2016E 2017E EBITDA margin (%) 30.4 29.0 27.3 28.9 RoE (%) 22.6 20.6 21.2 23.7 RoCE (%) 21.4 19.4 19.9 22.4 EV / sales (x) 2.2 2.1 2.0 1.7 EV / EBITDA (x) 7.4 7.4 7.3 6.0 PE (x) 13.7 15.2 14.1 11.8 P / BV (x) 3.2 3.1 2.9 2.7 Net dividend yield (%) 8.6 6.1 5.0 5.3 Source: Company Data; PL Research Q2FY16 Result 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
Exhibit 1: Q2FY16 Result Overview (Rs m) Y/e March Q2FY16 Q2FY15 YoY gr. (%) Q1FY16 H1FY16 H1FY15 YoY gr. (%) Net operating revenue 169,576 156,780 8.2 189,558 359,133 334,775 7.3 Other operating income 5,323 4,865 9.4 5,623 10,946 9,925 10.3 Revenue (including other operating income) 174,899 161,645 8.2 195,181 370,080 344,701 7.4 (Accretion)/Decretion in Stocks 7,112 7,302 (2.6) 5,931 13,043 12,862 1.4 Consumption of stores and spares 16,443 16,927 (2.9) 15,867 32,309 32,634 (1.0) Employees' Remuneration & Benefits 75,304 72,940 3.2 71,852 147,156 143,486 2.6 Power & Fuel 6,537 5,854 11.7 5,882 12,419 11,289 10.0 Welfare expenses 1,862 597 211.9 1,773 3,635 1,111 227.1 Repairs 2,575 2,552 0.9 2,165 4,740 4,484 5.7 Contractual Expenses 22,542 16,264 38.6 24,903 47,446 34,253 38.5 Other Expenses 8,800 6,898 27.6 7,513 16,314 13,324 22.4 Overburden Removal Adjustment 410 5,536 (92.6) 7,091 7,501 12,337 (39.2) Provision and write off 3,230 1,215 165.9 2,761 5,991 5,491 9.1 Total Cost of Sales 144,815 136,084 6.4 145,738 290,553 271,270 7.1 EBITDA 30,084 25,560 17.7 49,442 79,526 73,431 8.3 as a % of Sales 17.7 16.3 26.1 22.1 21.9 Depreciation 5,864 5,363 9.3 5,575 11,439 10,546 8.5 EBIT 24,220 20,197 19.9 43,867 68,087 62,884 8.3 Interest 15 11 42.1 40 56 22 151.1 PBT (before other income) 24,205 20,186 19.9 43,827 68,032 62,862 8.2 Other Income 14,314 15,357 (6.8) 14,471 28,785 32,101 (10.3) PBT before extraordinaries 38,518 35,543 8.4 58,298 96,816 94,964 2.0 Exceptional items 248 48 (226) 22 206 PBT after extraordinaries 38,766 35,591 8.9 58,072 96,838 95,169 1.8 Provision for Taxation 13,328 13,668 (2.5) 20,429 33,757 32,913 2.6 Net profit 25,438 21,924 16.0 37,643 63,081 62,256 1.3 Adjusted PAT 25,275 21,892 15.5 37,793 63,067 62,120 1.5 Source: Company Data, PL Research November 13, 2015 2
Exhibit 2: Operating Metrics Y/e March Q2FY16 Q2FY15 YoY gr. (%) Q1FY16 H1FY16 H1FY15 YoY gr. (%) Coal production (m tonnes) 108.2 102.4 5.6 121.4 229.6 210.7 8.9 Coal sales volume (m tonnes) 122.0 110.5 10.4 129.4 251.4 230.1 9.3 Rs/tonne analysis on aggregate volumes Net realisation (excluding other operating income) 1,390 1,419 (2.0) 1,465 1,429 1,455 (1.8) Realisation (including other operating income) 1,434 1,463 (2.0) 1,508 1,472 1,498 (1.7) Total cost/tonne 1,187 1,232 (3.6) 1,126 1,156 1,179 (2.0) EBITDA/tonne 247 231 6.6 382 316 319 (0.9) Sales volume mix (m tonnes) FSA 103.0 96.1 7.2 109.0 212.0 195.3 8.6 E auction 14.7 10.6 38.7 16.0 30.7 27.4 12.1 Washed coal 3.1 2.8 12.9 3.4 6.6 5.7 14.3 Realisation per tonne (Rs) FSA 1,294 1,260 2.7 1,318 1,307 1,290 1.3 E auction 1,788 2,496 (28.4) 2,184 1,994 2,343 (14.9) Washed coal 2,328 2,444 (4.7) 2,229 2,276 2,418 (5.9) Source: Company Data, PL Research November 13, 2015 3
Income Statement (Rs m) Net Revenue 706,075 741,201 791,620 897,194 Raw Material Expenses 71,147 67,260 75,126 79,518 Gross Profit 634,928 673,941 716,494 817,677 Employee Cost 279,144 298,741 308,612 347,348 Other Expenses 141,218 160,598 191,751 210,743 EBITDA 214,566 214,602 216,131 259,586 Depr. & Amortization 52,830 61,465 48,397 48,140 Net Interest 580 73 78 89 Other Income 71,733 65,756 58,977 61,235 Profit before Tax 232,889 218,820 226,633 272,593 Total Tax 77,679 78,573 75,857 91,416 Profit after Tax 155,210 140,247 150,776 181,177 Ex Od items / Min. Int. 9 33 Adj. PAT 155,201 140,214 150,776 181,177 Avg. Shares O/S (m) 6,316.4 6,316.4 6,316.4 6,316.4 EPS (Rs.) 24.6 22.2 23.9 28.7 Cash Flow Abstract (Rs m) C/F from Operations 145,247 143,815 144,159 179,315 C/F from Investing 23,590 3,857 (13,629) (12,173) C/F from Financing (253,503) (150,257) (128,269) (130,405) Inc. / Dec. in Cash (84,665) (2,585) 2,261 36,736 Opening Cash 116,849 94,391 96,893 99,154 Closing Cash 94,391 96,893 99,154 135,890 FCFF 158,217 162,947 137,030 175,527 FCFE 146,945 165,249 132,947 175,527 Key Financial Metrics Growth Revenue (%) 1.1 5.0 6.8 13.3 EBITDA (%) (6.0) 0.7 20.1 PAT (%) (17.9) (9.7) 7.5 20.2 EPS (%) (17.9) (9.7) 7.5 20.2 Profitability EBITDA Margin (%) 30.4 29.0 27.3 28.9 PAT Margin (%) 22.0 18.9 19.0 20.2 RoCE (%) 21.4 19.4 19.9 22.4 RoE (%) 22.6 20.6 21.2 23.7 Balance Sheet Net Debt : Equity (0.8) (0.8) (0.8) (0.7) Net Wrkng Cap. (days) (640) (790) (709) (696) Valuation PER (x) 13.7 15.2 14.1 11.8 P / B (x) 3.2 3.1 2.9 2.7 EV / EBITDA (x) 7.4 7.4 7.3 6.0 EV / Sales (x) 2.2 2.1 2.0 1.7 Earnings Quality Eff. Tax Rate 33.4 35.9 33.5 33.5 Other Inc / PBT 30.8 30.0 26.0 22.5 Eff. Depr. Rate (%) 12.9 13.9 9.6 8.5 FCFE / PAT 94.7 117.9 88.2 96.9 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 672,192 689,945 733,059 794,790 Total Debt 1,781 4,083 Other Liabilities 35,925 40,653 44,537 48,861 Total Liabilities 709,899 734,681 777,596 843,651 Net Fixed Assets 191,002 212,744 251,240 286,798 Goodwill Investments 11,876 9,631 9,631 9,631 Net Current Assets 487,303 492,710 494,982 523,206 Cash & Equivalents 549,769 549,429 551,690 588,427 Other Current Assets 270,060 314,015 323,101 341,911 Current Liabilities 332,525 370,734 379,809 407,132 Other Assets 19,717 19,596 19,596 19,596 Total Assets 709,899 734,681 775,449 839,231 Quarterly Financials (Rs m) Y/e March Q3FY15 Q4FY15 Q1FY16 Q2FY16 Net Revenue 183,105 213,396 195,181 174,899 EBITDA 40,276 59,648 49,442 30,084 % of revenue 22.0 28.0 25.3 17.2 Depr. & Amortization 5,672 6,980 5,575 5,864 Net Interest (16,322) (17,232) (14,431) (14,298) Other Income 16,344 17,261 14,471 14,314 Profit before Tax 50,756 69,914 58,072 38,766 Total Tax 18,131 27,529 20,429 13,328 Profit after Tax 32,625 42,386 37,644 25,438 Adj. PAT 32,737 42,376 37,793 25,275 Key Operating Metrics Raw coal prod (mn tn) 462 494 533 576 Coal despatches (mn tn) 471 489 533 576 Vol sold under FSA/MoU (mn tn) 396 426 456 489 Vol sold under E auction (mn tn) 58 47 60 69 Beneficiated coal vol (mn tn) 13 12 13 14 Vol sold to power utilities (mn tn) 355 386 418 450 Real. / tonne (Rs) 1,461 1,473 1,441 1,514 Total cost per tonne (Rs) 1,081 1,122 1,161 1,140 Cash cost per tonne (Rs) 1,012 1,052 1,083 1,094 Employee cost / tonne (Rs) 604 604 604 579 EBITDA / tonne (Rs) 377 355 345 399 OBR adj / tonne (Rs) 71 71 77 46 Source: Company Data, PL Research. November 13, 2015 4
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 44.7% 42.7% 12.6% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Kamlesh Bagmar (CA, CFA), Mr. Ankit Shah (BE, MBA, CFA (US)), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Kamlesh Bagmar (CA, CFA), Mr. Ankit Shah (BE, MBA, CFA (US)), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. November 13, 2015 5