Earnings marred by weak realisations; Downgrade to Accumulate September 14, 2016 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating Accumulate Price Rs332 Target Price Rs320 Implied Upside 3.6% Sensex 28,797 Nifty 8,867 (Prices as on September 12, 2016) Trading data Market Cap. (Rs bn) 2,098.0 Shares o/s (m) 6,316.4 3M Avg. Daily value (Rs m) 1070.7 Major shareholders Promoters 79.65% Foreign 9.04% Domestic Inst. 8.44% Public & Other 2.87% Stock Performance (%) 1M 6M 12M Absolute (1.4) 3.0 (1.9) Relative (4.0) (13.2) (13.9) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 21.4 24.1 11.1 2018 22.5 27.0 16.6 Price Performance (RIC: COAL.BO, BB: COAL IN) (Rs) 400 350 300 250 200 150 100 50 0 Sep 15 Nov 15 Source: Bloomberg Jan 16 Mar 16 May 16 Jul 16 Sep 16 Coal India (COAL) reported Q1FY17 earnings below our expectation. The key reason for disappointment was the sharper than expected fall in linkage realisations despite partial benefit of 6% price hike (effective from 30th May). E auction realisations came ~12% higher than our estimate. We cut our EBITDA estimates for FY17/FY18 by 7%/3% due to lowering of volumes and FSA realisations. Given the low upside potential, we downgrade the stock from "BUY" to "Accumulate" with TP of Rs320, EV/EBITDA of 7x FY18E. Weak FSA realisations drive the miss: Total volumes rose 3% YoY to 133m tonnes (t) in line with our estimate. FSA volumes fell 1% YoY at 107.7mt (PLe: 108.8mt) while E auction volumes rose 28% YoY at 20.5mt (PLe: 20.0mt). Blended Realisations fell 9% YoY at Rs1336 below our estimate of Rs1369 due to lower than expected FSA realisations ( 6% YoY at Rs1239 v/s PLe:Rs1307), offset by higher e auction realisations ( 28% YoY at Rs1570 v/s PLe: Rs1400). Lower realisations pulls EBITDA down by 19% YoY; accounting for OBR adjustment continued: Total cost/t fell 6% YoY at Rs1063 (not comparable to our estimates as we had not included OBR) due to lower OBR and stores & spares cost. Cash cost (adjusted for OBR adj and provisions) fell 3.7% YoY at Rs1037 (PLe:Rs1012). Offset by 67% fall in OBR adj, fall in reported EBITDA was restricted to 12% YoY at Rs42.5bn. However, the core EBITDA (adjusted for OBR) fell sharply by 19% YoY to Rs44.9bn (PLe:Rs49.8bn). PAT fell 15% YoY to Rs30.6bn helped by lower tax rate (at 33.8% v/s 35% in Q1FY16, PLe: 33%), partly offset by lower other income ( 21% YoY at Rs11.3bn v/s PLe: Rs13.5bn). Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 741,201 780,101 826,612 902,463 Growth (%) 5.0 5.2 6.0 9.2 EBITDA (Rs m) 211,621 208,133 206,160 232,132 PAT (Rs m) 137,233 138,687 135,355 142,313 EPS (Rs) 21.7 22.0 21.4 22.5 Growth (%) (9.2) 1.1 (2.4) 5.1 Net DPS (Rs) 20.7 27.4 22.0 24.0 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 28.6 26.7 24.9 25.7 RoE (%) 20.1 20.6 20.9 22.5 RoCE (%) 19.0 19.4 19.7 21.1 EV / sales (x) 2.1 2.1 2.1 1.9 EV / EBITDA (x) 7.3 8.0 8.2 7.6 PE (x) 15.3 15.1 15.5 14.7 P / BV (x) 3.0 3.2 3.3 3.4 Net dividend yield (%) 6.2 8.2 6.6 7.2 Source: Company Data; PL Research Q1FY17 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: EBITDA for FY17/FY18 revised downward by 7%/3% FY17E FY18E Earlier Post revision % change Earlier Post revision % change Revenue (Rs m) 823,743 801,753 (2.7) 914,854 901,418 (1.5) Reported EBITDA (Rs m) incl. OBR adj 222,392 188,791 (15.1) 239,543 213,140 (11.0) Adjusted EBITDA (Rs m) net of OBR adj 222,392 206,160 (7.3) 239,543 232,132 (3.1) Reported PAT (Rs m) incl. OBR adj 159,754 135,355 (15.3) 161,978 142,313 (12.1) Adjusted PAT (Rs m) net of OBR adj 159,754 146,840 (8.1) 161,978 154,871 (4.4) Reported EPS (Rs m) incl. OBR adj 25.3 21.4 (15.3) 25.6 22.5 (12.1) Adjusted EPS (Rs m) net of OBR adj 25.3 23.2 (8.1) 25.6 24.5 (4.4) Volumes (m tonnes) 561.9 550.3 (2.1) 612.6 601.9 (1.7) FSA 476.6 450.0 (5.6) 521.5 491.0 (5.9) E auction 70.0 85.0 21.4 75.0 95.0 26.7 Washed coal 15.3 15.3 16.1 15.9 (0.8) Realisation per tonne 1,466 1,457 (0.6) 1,493 1,498 0.3 FSA 1,379 1,363 (1.1) 1,413 1,404 (0.7) E auction 1,650 1,600 (3.0) 1,650 1,650 Washed coal 2,421 2,503 3.4 2,446 2,553 4.4 Reported cost/t 1,070 1,114 4.1 1,102 1,143 3.7 Adj. cost/t 1,070 1,082 1.1 1,102 1,112 0.9 Reported EBITDA/t 396 343 (13.3) 391 354 (9.4) Adj. EBITDA/t 396 375 (5.3) 391 386 (1.4) Source: Company Data, PL Research We revise downward our EBITDA/EPS estimate for FY17 by 7%/8% due to 1%/2% reduction in realisations/volumes. The cut in estimates got arrested due to increase in E auction volumes by 21% over previous estimates. EBITDA/EPS estimate for FY18 are revised downward by 3%/4%, primarily to account for 2% cut in volumes. September 14, 2016 2
Exhibit 2: Q1FY17 Result Overview (Rs m) Y/e March Q1FY17 Q1FY16 YoY gr. (%) Q4FY16 FY17E FY16 YoY gr. (%) Net operating revenue 177,961 189,558 (6.1) 207,595 801,753 756,443 6.0 Other operating income 6,258 5,623 11.3 6,433 24,859 23,659 5.1 Revenue (including other operating income) 184,219 195,181 (5.6) 214,028 826,612 780,101 6.0 (Accretion)/Decretion in Stocks 40 5,931 (99.3) (21,864) (14,442) Consumption of stores and spares 14,869 15,863 (6.3) 20,711 71,471 70,822 0.9 Employees' Remuneration & Benefits 76,465 74,899 2.1 75,902 320,706 299,645 7.0 Power & Fuel 6,225 5,882 5.8 6,433 25,263 25,035 0.9 Welfare expenses 425 1,773 (76.0) 3,898 11,699 10,821 8.1 Repairs 2,340 2,165 8.1 4,702 12,985 12,423 4.5 Contractual Expenses 28,006 24,887 12.5 34,232 116,891 111,276 5.0 Other Expenses 9,777 7,546 29.6 14,387 47,406 39,370 20.4 Overburden Removal Adjustment 2,331 7,091 (67.1) 13,195 17,370 28,114 (38.2) Provision and write off 1,193 792 50.7 7,096 14,031 15,064 (6.9) Total Cost of Sales 141,670 146,829 (3.5) 158,689 637,821 598,129 6.6 EBITDA 42,548 48,352 (12.0) 55,338 188,791 181,972 3.7 as a % of Sales 23.9 25.5 26.7 23.5 24.1 Depreciation 6,672 6,379 4.6 6,946 28,168 25,468 10.6 EBIT 35,877 41,973 (14.5) 48,392 160,623 156,504 2.6 Interest 890 888 0.2 121 3,000 1,054 184.7 PBT (before other income) 34,987 41,085 (14.8) 48,271 157,623 155,450 1.4 Other Income 11,306 14,249 (20.7) 14,960 47,088 57,062 (17.5) PBT before extraordinaries 46,293 55,334 (16.3) 63,231 204,711 212,512 (3.7) Exceptional items 56 640 PBT after extraordinaries 46,293 55,334 (16.3) 63,287 204,711 213,153 (4.0) Provision for Taxation 15,641 19,365 (19.2) 20,807 69,356 72,084 (3.8) Net profit 30,653 35,969 (14.8) 42,479 135,355 141,069 (4.1) Adjusted PAT 30,653 35,969 (14.8) 42,443 135,355 140,646 (3.8) Source: Company Data, PL Research September 14, 2016 3
Exhibit 3: Operating Metrics Y/e March Q1FY17 Q1FY16 YoY gr. (%) Q4FY16 FY17E FY16 YoY gr. (%) Coal production (m tonnes) 125.7 121.4 3.6 165.2 555.2 538.8 3.0 Coal sales volume (m tonnes) 133.2 129.4 3.0 145.2 555.2 534.5 3.9 Rs/tonne analysis on aggregate volumes Net realisation (excluding other operating income) 1,336 1,465 (8.8) 1,430 1,444 1,415 2.0 Realisation (including other operating income) 1,383 1,508 (8.3) 1,474 1,489 1,460 2.0 Total cost/tonne 1,063 1,135 (6.3) 1,093 1,149 1,119 2.7 EBITDA/tonne 319 374 (14.5) 381 340 340 (0.1) Sales volume mix (m tonnes) FSA 107.7 109.0 (1.2) 119.3 450.0 447.7 0.5 E auction 20.5 16.0 27.9 20.4 85.0 66.3 28.2 Washed coal 3.8 3.4 10.0 4.1 15.3 14.3 7.0 Realisation per tonne (Rs) FSA 1,239 1,318 (6.0) 1,350 1,363 1,311 4.0 E auction 1,570 2,184 (28.1) 1,648 1,600 1,858 (13.9) Washed coal 2,557 2,229 14.7 2,375 2,503 2,328 7.5 Source: Company Data, PL Research September 14, 2016 4
Income Statement (Rs m) Net Revenue 741,201 780,101 826,612 902,463 Raw Material Expenses 67,260 56,380 71,471 79,708 Gross Profit 673,941 723,721 755,141 822,754 Employee Cost 298,741 299,645 320,706 328,605 Other Expenses 163,579 215,943 228,275 262,017 EBITDA 211,621 208,133 206,160 232,132 Depr. & Amortization 61,465 53,583 45,537 50,930 Net Interest 73 1,054 3,000 3,000 Other Income 65,756 57,703 47,088 37,034 Profit before Tax 215,839 211,199 204,711 215,235 Total Tax 78,573 72,084 69,356 72,922 Profit after Tax 137,266 139,115 135,355 142,313 Ex Od items / Min. Int. 33 429 Adj. PAT 137,233 138,687 135,355 142,313 Avg. Shares O/S (m) 6,316.4 6,316.4 6,316.4 6,316.4 EPS (Rs.) 21.7 22.0 21.4 22.5 Cash Flow Abstract (Rs m) C/F from Operations 143,815 110,133 158,259 159,966 C/F from Investing 3,857 (14,912) (34,081) (44,744) C/F from Financing (150,257) (205,138) (161,501) (176,100) Inc. / Dec. in Cash (2,585) (109,918) (37,322) (60,878) Opening Cash 94,391 96,893 (13,025) (50,347) Closing Cash 96,893 (13,025) (50,347) (111,225) FCFF 159,966 92,300 124,178 115,222 FCFE 162,268 90,218 124,178 115,222 Key Financial Metrics Growth Revenue (%) 5.0 5.2 6.0 9.2 EBITDA (%) 0.5 (1.6) (0.9) 12.6 PAT (%) (9.2) 1.1 (2.4) 5.1 EPS (%) (9.2) 1.1 (2.4) 5.1 Profitability EBITDA Margin (%) 28.6 26.7 24.9 25.7 PAT Margin (%) 18.5 17.8 16.4 15.8 RoCE (%) 19.0 19.4 19.7 21.1 RoE (%) 20.1 20.6 20.9 22.5 Balance Sheet Net Debt : Equity (0.8) (0.7) (0.6) (0.5) Net Wrkng Cap. (days) (790) (885) (701) (648) Valuation PER (x) 15.3 15.1 15.5 14.7 P / B (x) 3.0 3.2 3.3 3.4 EV / EBITDA (x) 7.3 8.0 8.2 7.6 EV / Sales (x) 2.1 2.1 2.1 1.9 Earnings Quality Eff. Tax Rate 36.4 34.1 33.9 33.9 Other Inc / PBT 30.4 27.1 23.0 17.2 Eff. Depr. Rate (%) 13.9 10.6 7.9 7.9 FCFE / PAT 118.2 65.1 91.7 81.0 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 689,945 653,624 640,986 621,896 Total Debt 4,083 2,001 2,001 2,001 Other Liabilities 40,653 44,443 48,304 52,600 Total Liabilities 734,681 700,068 691,292 676,497 Net Fixed Assets 212,744 250,235 294,286 334,774 Goodwill Investments 9,631 9,631 9,631 9,631 Net Current Assets 492,710 420,606 367,779 312,496 Cash & Equivalents 549,429 439,512 402,189 341,311 Other Current Assets 314,015 355,920 355,929 377,307 Current Liabilities 370,734 374,826 390,340 406,121 Other Assets 19,596 19,596 19,596 19,596 Total Assets 734,681 700,068 691,292 676,497 Quarterly Financials (Rs m) Y/e March Q2FY16 Q3FY16 Q4FY16 Q1FY17E Net Revenue 174,899 195,994 214,028 188,053 EBITDA 30,084 48,198 55,338 49,813 % of revenue 17.2 24.6 25.9 26.5 Depr. & Amortization 5,864 6,279 6,946 7,000 Net Interest (14,298) (13,510) (14,839) (13,380) Other Income 14,314 13,539 14,960 13,500 Profit before Tax 38,766 55,766 63,287 56,193 Total Tax 13,328 18,584 20,807 18,544 Profit after Tax 25,438 37,182 42,479 37,650 Adj. PAT 25,275 36,960 42,443 37,650 Key Operating Metrics Raw coal prod (mn tn) 494 539 555 607 Coal despatches (mn tn) 489 534 555 607 Vol sold under FSA/MoU (mn tn) 426 448 450 491 Vol sold under E auction (mn tn) 47 66 85 95 Beneficiated coal vol (mn tn) 12 14 15 16 Vol sold to power utilities (mn tn) 386 418 450 Real. / tonne (Rs) 1,473 1,416 1,445 1,486 Total cost per tonne (Rs) 1,122 1,161 1,118 1,150 Cash cost per tonne (Rs) 1,052 1,083 1,065 1,118 Employee cost / tonne (Rs) 604 604 550 578 EBITDA / tonne (Rs) 355 343 340 351 OBR adj / tonne (Rs) 71 77 52 31 Source: Company Data, PL Research. September 14, 2016 5
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 70% 60% 50% 40% 30% 20% 10% 0% 58.6% 26.7% 14.7% 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), 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), 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. September 14, 2016 6