Lower costs and higher scale off sets weaker realisations February 12, 2016 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating BUY Price Rs305 Target Price Rs400 Implied Upside 31.1% Sensex 22,952 Nifty 6,976 (Prices as on February 11, 2016) Trading data Market Cap. (Rs bn) 1,927.1 Shares o/s (m) 6,316.4 3M Avg. Daily value (Rs m) 1110 Major shareholders Promoters 79.65% Foreign 9.04% Domestic Inst. 8.44% Public & Other 2.87% Stock Performance (%) 1M 6M 12M Absolute (3.4) (22.3) (18.0) Relative 4.1 (4.7) 1.6 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 28.1 27.2 3.3 2018 29.2 30.6 4.7 Price Performance (RIC: COAL.BO, BB: COAL IN) (Rs) 500 400 300 200 100 0 Feb 15 Apr 15 Jun 15 Source: Bloomberg Aug 15 Oct 15 Dec 15 Feb 16 Coal India (COAL) reported Q3FY16 earnings above our expectation on the back of lower than expected costs. Company s E auction volumes and realisations improved 2.8%/4.3% QoQ against our expectation of 5%/ 0.7%. Concerns of lower realisations in E auction would be allayed by offering higher quantities with higher grade. Street is overly apprehensive on COAL s ability to pass on the impact of escalation in cost associated with hike in wages of non executive employees. While, we believe that 6% price hike in power segment and higher scale (+10% increase in volumes) would well off set the impact. Driven by attractive valuations (EV/EBITDA:6x FY17E), strong outlook on volumes and rich dividend yield, we maintain BUY rating with TP of Rs400, EV/EBITDA of 8x FY17E. Realizations below expectations due to weak FSA realization: Volumes rose 10.7% YoY to 138m (PLe:138m) tonnes (t). Led by lower than expected FSA realization, realisations were lower than our expectation at Rs1376 (PLe: Rs1402), down 3.5% YoY. Realisations in FSA fell 1.6% YoY ( 1.3% QoQ) at Rs1277 (PLe:Rs1317). E auction volumes rose 171% YoY (+2.8% QoQ) at 15.2mt (PLe:14mt). While, realisations fell 40.5% YoY (+4.3% QoQ) to Rs1866 (PLe: Rs1800)/t. Washed coal s volumes rose 22% YoY at 3.7m (PLe:3.2m) t with realisations at Rs2369 (PLe:Rs2500), down 9.6% YoY (+1.8% QoQ). Scale benefits drive beat in EBITDA: Thanks to strong scale benefit, lower employee costs and lower OBR cost, total cost/t fell 6.5% YoY at Rs1072, below our expectation of Rs1118. Adjusted for OBR and provisions, cash cost fell 4.6% YoY at Rs989 (PLe:Rs1042). Driven by lower costs, EBITDA came ahead of our expectation at Rs48.2bn (PLe:Rs45.4bn), up 19.7% YoY. Lower than expected other income restricted growth in PAT at 12.9% YoY to Rs37.0bn (PLe: Rs35.7bn). Other income fell 17.2% YoY at Rs13.5bn (PLe:Rs15bn), primarily due to lower yields on treasury investments. Key financials (Y/e March) 2015 2016E 2017E 2018E Revenues (Rs m) 741,201 790,439 890,148 983,391 Growth (%) 5.0 6.6 12.6 10.5 EBITDA (Rs m) 214,602 223,750 259,756 283,542 PAT (Rs m) 140,214 154,502 177,256 184,435 EPS (Rs) 22.2 24.5 28.1 29.2 Growth (%) (9.7) 10.2 14.7 4.1 Net DPS (Rs) 20.7 20.7 22.0 24.0 Profitability & Valuation 2015 2016E 2017E 2018E EBITDA margin (%) 29.0 28.3 29.2 28.8 RoE (%) 20.6 22.1 24.7 25.0 RoCE (%) 19.4 20.8 23.1 23.3 EV / sales (x) 1.9 1.8 1.6 1.4 EV / EBITDA (x) 6.4 6.3 5.4 5.0 PE (x) 13.7 12.5 10.9 10.4 P / BV (x) 2.8 2.7 2.6 2.6 Net dividend yield (%) 6.8 6.8 7.2 7.9 Source: Company Data; PL Research Q3FY16 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: Q3FY16 Result Overview (Rs m) Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Net operating revenue 189,715 177,629 6.8 169,576 548,848 512,404 7.1 Other operating income 6,279 5,476 14.7 5,323 17,226 15,401 11.8 Revenue (including other operating income) 195,994 183,105 7.0 174,899 566,074 527,805 7.3 (Accretion)/Decretion in Stocks (5,621) (4,663) 20.5 7,112 7,422 8,200 (9.5) Consumption of stores and spares 17,805 18,420 (3.3) 16,443 50,115 51,054 (1.8) Employees' Remuneration & Benefits 73,541 74,914 (1.8) 75,304 220,697 218,400 1.1 Power & Fuel 6,183 6,089 1.5 6,537 18,602 17,378 7.0 Welfare expenses 3,288 728 351.8 1,862 6,923 1,839 276.4 Repairs 2,982 2,620 13.8 2,575 7,722 7,104 8.7 Contractual Expenses 29,615 22,825 29.7 22,542 77,061 57,078 35.0 Other Expenses 8,638 8,204 5.3 8,800 24,951 21,528 15.9 Overburden Removal Adjustment 7,419 10,179 (27.1) 410 14,920 22,515 (33.7) Provision and write off 3,946 3,513 12.3 3,230 9,937 9,004 10.4 Total Cost of Sales 147,796 142,829 3.5 144,815 438,349 414,099 5.9 EBITDA 48,198 40,276 19.7 30,084 127,725 113,706 12.3 as a % of Sales 25.4 22.7 17.7 23.3 22.2 Depreciation 6,279 5,672 10.7 5,864 17,718 16,218 9.2 EBIT 41,920 34,604 21.1 24,220 110,007 97,488 12.8 Interest 30 22 33.8 15 85 44 92.3 PBT (before other income) 41,890 34,581 21.1 24,205 109,921 97,443 12.8 Other Income 13,539 16,344 (17.2) 14,314 42,324 48,445 (12.6) PBT before extraordinaries 55,429 50,925 8.8 38,518 152,245 145,889 4.4 Exceptional items 337 (170) 248 359 36 PBT after extraordinaries 55,766 50,756 9.9 38,766 152,604 145,925 4.6 Provision for Taxation 18,584 18,131 2.5 13,328 52,341 51,044 2.5 Net profit 37,182 32,625 14.0 25,438 100,264 94,881 5.7 Adjusted PAT 36,960 32,737 12.9 25,275 100,027 94,857 5.5 Source: Company Data, PL Research February 12, 2016 2
Exhibit 2: Operating Metrics Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Coal production (m tonnes) 144.0 131.6 9.4 108.2 373.5 342.4 9.1 Coal sales volume (m tonnes) 137.9 124.6 10.7 122.0 389.3 354.7 9.8 Rs/tonne analysis on aggregate volumes Net realisation (excluding other operating income) 1,376 1,426 (3.5) 1,390 1,410 1,445 (2.4) Realisation (including other operating income) 1,421 1,470 (3.3) 1,434 1,454 1,488 (2.3) Total cost/tonne 1,072 1,147 (6.5) 1,187 1,126 1,168 (3.6) EBITDA/tonne 350 323 8.1 247 328 321 2.3 Sales volume mix (m tonnes) FSA 116.4 114.7 1.5 103.0 328.4 310.0 5.9 E auction 15.2 5.6 171.2 14.7 45.9 33.0 39.1 Washed coal 3.7 3.0 22.0 3.1 10.2 8.7 17.0 Realisation per tonne (Rs) FSA 1,277 1,298 (1.6) 1,294 1,296 1,293 0.2 E auction 1,866 3,134 (40.5) 1,788 1,952 2,477 (21.2) Washed coal 2,369 2,620 (9.6) 2,328 2,310 2,487 (7.1) Source: Company Data, PL Research February 12, 2016 3
Income Statement (Rs m) Net Revenue 741,201 790,439 890,148 983,391 Raw Material Expenses 67,260 69,968 74,401 83,483 Gross Profit 673,941 720,472 815,747 899,908 Employee Cost 298,741 302,296 340,239 373,521 Other Expenses 160,598 194,426 215,753 242,845 EBITDA 214,602 223,750 259,756 283,542 Depr. & Amortization 61,465 48,999 48,891 54,491 Net Interest 73 115 130 147 Other Income 65,756 57,334 55,431 47,594 Profit before Tax 218,820 231,970 266,166 276,497 Total Tax 78,573 77,468 88,911 92,062 Profit after Tax 140,247 154,502 177,256 184,435 Ex Od items / Min. Int. 33 Adj. PAT 140,214 154,502 177,256 184,435 Avg. Shares O/S (m) 6,316.4 6,316.4 6,316.4 6,316.4 EPS (Rs.) 22.2 24.5 28.1 29.2 Cash Flow Abstract (Rs m) C/F from Operations 143,815 146,575 178,694 194,869 C/F from Investing 3,857 (13,402) (15,842) (34,314) C/F from Financing (150,257) (154,694) (161,086) (175,951) Inc. / Dec. in Cash (2,585) (21,520) 1,766 (15,397) Opening Cash 94,391 96,893 75,372 77,138 Closing Cash 96,893 75,372 77,138 61,742 FCFF 162,947 140,353 172,050 170,977 FCFE 165,249 138,271 172,050 170,977 Key Financial Metrics Growth Revenue (%) 5.0 6.6 12.6 10.5 EBITDA (%) 4.3 16.1 9.2 PAT (%) (9.7) 10.2 14.7 4.1 EPS (%) (9.7) 10.2 14.7 4.1 Profitability EBITDA Margin (%) 29.0 28.3 29.2 28.8 PAT Margin (%) 18.9 19.5 19.9 18.8 RoCE (%) 19.4 20.8 23.1 23.3 RoE (%) 20.6 22.1 24.7 25.0 Balance Sheet Net Debt : Equity (0.8) (0.7) (0.7) (0.7) Net Wrkng Cap. (days) (790) (770) (749) (690) Valuation PER (x) 13.7 12.5 10.9 10.4 P / B (x) 2.8 2.7 2.6 2.6 EV / EBITDA (x) 6.4 6.3 5.4 5.0 EV / Sales (x) 1.9 1.8 1.6 1.4 Earnings Quality Eff. Tax Rate 35.9 33.4 33.4 33.3 Other Inc / PBT 30.0 24.7 20.8 17.2 Eff. Depr. Rate (%) 13.9 9.7 8.6 8.5 FCFE / PAT 117.9 89.5 97.1 92.7 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 689,945 705,656 729,943 747,314 Total Debt 4,083 2,001 2,001 2,001 Other Liabilities 40,653 44,527 48,803 53,248 Total Liabilities 734,681 752,184 780,748 802,563 Net Fixed Assets 212,744 250,761 285,787 327,606 Goodwill Investments 9,631 9,631 9,631 9,631 Net Current Assets 492,710 472,196 465,734 445,730 Cash & Equivalents 549,429 527,909 529,675 514,278 Other Current Assets 314,015 321,096 339,401 362,253 Current Liabilities 370,734 376,809 403,342 430,802 Other Assets 19,596 19,596 19,596 19,596 Total Assets 734,681 752,184 780,748 802,563 Quarterly Financials (Rs m) Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Net Revenue 213,396 195,181 174,899 195,994 EBITDA 59,648 49,442 30,084 48,198 % of revenue 28.0 25.3 17.2 24.6 Depr. & Amortization 6,980 5,575 5,864 6,279 Net Interest (17,232) (14,431) (14,298) (13,510) Other Income 17,261 14,471 14,314 13,539 Profit before Tax 69,914 58,072 38,766 55,766 Total Tax 27,529 20,429 13,328 18,584 Profit after Tax 42,386 37,644 25,438 37,182 Adj. PAT 42,376 37,793 25,275 36,960 Key Operating Metrics Raw coal prod (mn tn) 494 535 581 639 Coal despatches (mn tn) 489 535 581 639 Vol sold under FSA/MoU (mn tn) 426 456 500 557 Vol sold under E auction (mn tn) 47 61 62 62 Beneficiated coal vol (mn tn) 12 14 15 16 Vol sold to power utilities (mn tn) 386 418 450 Real. / tonne (Rs) 1,473 1,432 1,487 1,537 Total cost per tonne (Rs) 1,122 1,161 1,120 1,138 Cash cost per tonne (Rs) 1,052 1,083 1,073 1,101 Employee cost / tonne (Rs) 604 604 565 586 EBITDA / tonne (Rs) 355 356 394 390 OBR adj / tonne (Rs) 71 77 46 37 Source: Company Data, PL Research. February 12, 2016 4
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