Misses estimates; Higher costs dims hope for earnings recovery February 13, 2017 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Rating Reduce Price Rs325 Target Price Rs320 Implied Upside 1.5% Sensex 28,334 Nifty 8,794 (Prices as on February 10, 2017) Trading data Market Cap. (Rs bn) 2,015.9 Shares o/s (m) 6,207.4 3M Avg. Daily value (Rs m) 1094.5 Major shareholders Promoters 79.65% Foreign 9.04% Domestic Inst. 8.44% Public & Other 2.87% Stock Performance (%) 1M 6M 12M Absolute 8.1 (3.9) 3.4 Relative 2.8 (5.9) (15.9) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2018 15.2 22.9 33.4 2019 17.8 26.0 31.6 Price Performance (RIC: COAL.BO, BB: COAL IN) (Rs) 400 350 300 250 200 150 100 50 0 Feb 16 Apr 16 Jun 16 Source: Bloomberg Aug 16 Oct 16 Dec 16 Feb 17 Coal India (COAL) reported Q3FY17 earnings below our expectation. The key reason for miss continued to be weaker FSA realisations. As expected, E auction showed strong improvement in volumes and realisations on the back of global recovery in coal prices. However, reversal in global prices during last couple of months and slowing demand poses significant downside risk to E auction realisations. Given the expensive valuations and subdued earnings outlook, we maintain "Reduce" with TP of Rs320, EV/EBITDA of 7x FY19E. Weak FSA realisations and lower E auction volumes drive the miss: Total volumes rose 3.5% YoY to 143m tonnes (t) in line with our estimate. FSA volumes fell 3% YoY at 113mt (PLe: 110mt) while E auction volumes rose 66% YoY at 25mt (PLe: 28mt). FSA realisations rose 1% YoY (flat QoQ) at Rs1290 (PLe:Rs1300) while E auction fell 16% YoY ( 16% QoQ) at Rs1564 (PLe:Rs1550). Owing to fall in E auction realisation, Blended realisations rose marginally by 0.4% YoY at Rs1,380 below our estimate of Rs1,400. Higher employee cost and weak realisations drags EBITDA by 78% YoY: Total cost/t rose 9% YoY at Rs1,160 (PLe:Rs1,130) on account of provision of Rs6.9bn for wage revision of Non executive employees (became effective from 1 st July,16) and sharp increase in other operational costs. Cash cost (adjusted for OBR adj and provisions) rose 8% YoY at Rs1,075 (PLe:Rs1,088). COAL s reported EBITDA fell 21% YoY to Rs38.5bn, below our estimate of Rs46bn. The core EBITDA (adjusted for OBR) fell 13% YoY to Rs46.7bn (PLe:Rs48.8bn). PAT fell 20% YoY to Rs28.8bn (PLe:Rs33.8bn) impacted by lower other income ( 16% YoY at Rs11.2bn v/s PLe: Rs13bn), partly offset by lower tax rate (at 31% v/s 34% YoY, PLe: 34%). Key financials (Y/e March) 2016 2017E 2018E 2019E Revenues (Rs m) 780,101 779,560 867,532 947,571 Growth (%) 5.2 (0.1) 11.3 9.2 EBITDA (Rs m) 209,036 157,357 197,123 232,722 PAT (Rs m) 135,281 81,455 94,650 110,363 EPS (Rs) 21.4 13.1 15.2 17.8 Growth (%) (1.4) (38.7) 16.2 16.6 Net DPS (Rs) 27.4 20.0 22.0 22.0 Profitability & Valuation 2016 2017E 2018E 2019E EBITDA margin (%) 26.8 20.2 22.7 24.6 RoE (%) 20.1 13.0 16.1 19.1 RoCE (%) 19.0 12.3 15.0 17.6 EV / sales (x) 2.1 2.2 2.0 1.9 EV / EBITDA (x) 7.9 10.9 9.0 7.8 PE (x) 15.2 24.7 21.3 18.3 P / BV (x) 3.1 3.4 3.5 3.5 Net dividend yield (%) 8.4 6.2 6.8 6.8 Source: Company Data; PL Research Q3FY17 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: Q3 FY17 Result Overview (Rs m) Y/e March Q3FY17 Q3FY16 YoY gr. (%) Q2FY17 9MFY17 9MFY16 YoY gr. (%) Net operating revenue 197,045 189,715 3.9 156,451 531,456 548,848 (3.2) Other operating income 7,102 6,279 13.1 5,675 19,035 17,226 10.5 Revenue (including other operating income) 204,146 195,994 4.2 162,126 550,490 566,074 (2.8) (Accretion)/Decretion in Stocks (2,413) (5,621) (57.1) 7,169 4,795 7,422 Consumption of stores and spares 17,663 17,815 (0.9) 14,892 47,424 50,115 (5.4) Employees' Remuneration & Benefits 82,318 74,596 10.4 84,069 242,852 222,838 9.0 Power & Fuel 6,495 6,183 5.0 6,518 19,238 18,602 3.4 Welfare expenses 956 3,288 (70.9) 1,244 2,625 6,923 (62.1) Repairs 3,027 2,982 1.5 2,768 8,134 7,722 5.3 Contractual Expenses 33,681 29,473 14.3 23,666 85,353 76,783 11.2 Other Expenses 11,587 8,813 31.5 10,253 31,617 25,230 25.3 Overburden Removal Adjustment 8,124 7,419 9.5 1,425 11,879 14,920 (20.4) Provision and write off 4,161 2,042 103.7 2,696 8,049 4,091 96.8 Total Cost of Sales 165,597 146,989 12.7 154,699 461,967 434,645 6.3 EBITDA 38,549 49,005 (21.3) 7,426 88,524 131,429 (32.6) as a % of Sales 19.6 25.8 4.7 16.7 23.9 Depreciation 7,011 7,271 (3.6) 6,921 20,603 20,159 2.2 EBIT 31,538 41,734 (24.4) 506 67,921 111,270 (39.0) Interest 1,107 664 66.6 970 2,966 2,669 11.1 PBT (before other income) 30,432 41,070 (25.9) (464) 64,955 108,601 (40.2) Other Income 11,167 13,290 (16.0) 14,125 36,598 41,698 (12.2) PBT before extraordinaries 41,598 54,360 (23.5) 13,661 101,553 150,299 (32.4) Exceptional items PBT after extraordinaries 41,598 54,360 (23.5) 13,661 101,553 150,299 (32.4) Provision for Taxation 12,754 18,188 (29.9) 7,660 36,054 51,614 (30.1) Net profit 28,845 36,172 (20.3) 6,002 65,499 98,684 (33.6) Adjusted PAT 28,845 36,172 (20.3) 6,002 65,499 98,684 (33.6) Source: Company Data, PL Research February 13, 2017 2
Exhibit 2: Operating Metrics Y/e March Q3FY17 Q3FY16 YoY gr. (%) Q2FY17 9MFY17 9MFY16 YoY gr. (%) Coal production (m tonnes) 147.7 144.0 2.6 104.4 377.8 373.5 1.1 Coal sales volume (m tonnes) 142.7 137.9 3.5 115.9 391.8 389.3 0.6 Rs/tonne analysis on aggregate volumes Net realisation (excluding other operating income) 1,381 1,376 0.4 1,350 1,357 1,410 (3.8) Realisation (including other operating income) 1,431 1,421 0.7 1,399 1,405 1,454 (3.4) Total cost/tonne 1,161 1,066 8.9 1,335 1,179 1,117 5.6 EBITDA/tonne 270 355 (24.0) 64 226 338 (33.1) Sales volume mix (m tonnes) FSA 112.9 116.4 (3.1) 93.0 313.5 328.4 (4.5) E auction 25.2 15.2 66.2 19.1 64.7 45.9 41.0 Washed coal 3.5 3.7 (5.7) 3.1 10.3 10.2 0.5 Realisation per tonne (Rs) FSA 1,289 1,277 0.9 1,292 1,273 1,296 (1.8) E auction 1,564 1,866 (16.2) 1,348 1,502 1,952 (23.0) Washed coal 2,881 2,369 21.6 2,781 2,733 2,310 18.3 Source: Company Data, PL Research February 13, 2017 3
Income Statement (Rs m) Net Revenue 780,101 779,560 867,532 947,571 Raw Material Expenses 56,383 67,189 75,279 85,063 Gross Profit 723,718 712,371 792,253 862,509 Employee Cost 298,740 325,332 336,549 337,761 Other Expenses 215,943 229,682 258,581 292,026 EBITDA 209,036 157,357 197,123 232,722 Depr. & Amortization 55,220 72,926 80,761 88,356 Net Interest 2,791 3,000 3,000 3,000 Other Income 56,714 43,989 32,376 28,566 Profit before Tax 207,740 125,420 145,737 169,932 Total Tax 72,422 43,966 51,088 59,569 Profit after Tax 135,318 81,455 94,650 110,363 Ex Od items / Min. Int. 37 Adj. PAT 135,281 81,455 94,650 110,363 Avg. Shares O/S (m) 6,316.4 6,207.4 6,207.4 6,207.4 EPS (Rs.) 21.4 13.1 15.2 17.8 Cash Flow Abstract (Rs m) C/F from Operations 113,983 135,677 148,366 173,928 C/F from Investing (4,106) (38,412) (51,403) (56,967) C/F from Financing (198,553) (183,961) (158,867) (158,929) Inc. / Dec. in Cash (88,676) (86,696) (61,904) (41,968) Opening Cash 96,893 96,112 9,416 (52,488) Closing Cash 96,112 9,416 (52,488) (94,456) FCFF 121,168 97,265 96,963 116,961 FCFE 129,072 94,567 96,963 116,961 Key Financial Metrics Growth Revenue (%) 5.2 (0.1) 11.3 9.2 EBITDA (%) (1.2) (24.7) 25.3 18.1 PAT (%) (1.4) (39.8) 16.2 16.6 EPS (%) (1.4) (38.7) 16.2 16.6 Profitability EBITDA Margin (%) 26.8 20.2 22.7 24.6 PAT Margin (%) 17.3 10.4 10.9 11.6 RoCE (%) 19.0 12.3 15.0 17.6 RoE (%) 20.1 13.0 16.1 19.1 Balance Sheet Net Debt : Equity (0.6) (0.5) (0.4) (0.4) Net Wrkng Cap. (days) (911) (719) (647) (576) Valuation PER (x) 15.2 24.7 21.3 18.3 P / B (x) 3.1 3.4 3.5 3.5 EV / EBITDA (x) 7.9 10.9 9.0 7.8 EV / Sales (x) 2.1 2.2 2.0 1.9 Earnings Quality Eff. Tax Rate 34.9 35.1 35.1 35.1 Other Inc / PBT 27.3 35.1 22.2 16.8 Eff. Depr. Rate (%) 11.4 13.1 12.8 12.6 FCFE / PAT 95.4 116.1 102.4 106.0 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 653,504 596,119 577,668 578,694 Total Debt 11,988 9,290 9,290 9,290 Other Liabilities 44,398 47,371 51,014 54,595 Total Liabilities 709,890 652,780 637,973 642,579 Net Fixed Assets 242,549 287,195 328,164 365,479 Goodwill Investments 9,620 9,620 9,620 9,620 Net Current Assets 437,275 335,520 279,744 247,036 Cash & Equivalents 402,527 315,832 253,928 211,959 Other Current Assets 427,055 424,571 444,443 463,166 Current Liabilities 392,307 404,883 418,627 428,090 Other Assets 20,445 20,445 20,445 20,445 Total Assets 709,890 652,780 637,973 642,579 Quarterly Financials (Rs m) Y/e March Q4FY16 Q1FY17 Q2FY17 Q3FY17 Net Revenue 214,028 184,219 162,126 204,146 EBITDA 55,338 42,548 7,426 38,549 % of revenue 25.9 23.1 4.6 18.9 Depr. & Amortization 6,946 6,672 6,921 7,011 Net Interest (14,839) (10,417) (13,155) (10,060) Other Income 14,960 11,306 14,125 11,167 Profit before Tax 63,287 46,293 13,661 41,598 Total Tax 20,807 15,641 7,660 12,754 Profit after Tax 42,479 30,653 6,004 28,845 Adj. PAT 42,443 30,653 6,004 28,845 Key Operating Metrics Raw coal prod (mn tn) 539 544 580 624 Coal despatches (mn tn) 534 544 580 624 Vol sold under FSA/MoU (mn tn) 448 430 461 499 Vol sold under E auction (mn tn) 66 95 100 105 Beneficiated coal vol (mn tn) 14 14 15 16 Vol sold to power utilities (mn tn) 418 450 Real. / tonne (Rs) 1,416 1,385 1,446 1,467 Total cost per tonne (Rs) 1,161 1,118 1,228 1,241 Cash cost per tonne (Rs) 1,083 1,065 1,144 1,155 Employee cost / tonne (Rs) 604 550 598 580 EBITDA / tonne (Rs) 343 206 255 288 OBR adj / tonne (Rs) 77 52 83 85 Source: Company Data, PL Research. February 13, 2017 4
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