14 August 2018
Company Update | Sector: Utilities
Coal India
Buy
BSE SENSEX
31,771
S&P CNX
9,897
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CMP: INR237
TP: INR275(+16%)
Concerns largely priced in
Volume growth accelerating; TP revised to INR275; Buy
We attended Coal India’s (COAL) 1QFY18 analyst meet. Key takeaways:
1Q reflects full impact of grade slippage
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg. Val ( INRm)/Vol m
Free float (%)
COAL IN
6,207
350 / 234
-5/-38/-43
1,471.5
22.9
1186
21.1
FSA realization declined INR37/t YoY to INR1,201/t in 1QFY18 due to the sale of old
inventory (which has lost some GCV) and the full impact of re-grading of mines.
COAL de-stocked ~18mt in 1Q, highest in a quarter. Mines would be graded every
six months, with potential for even an upward revision. Incentive income is unlikely
going ahead (~INR7b in FY17) due to clubbing of linkages. We cut FSA realization by
INR43/t to INR1,233/t due to grade slippages and no incentive income.
Demand growth accelerating as power plants re-stock
Dispatches in the first 15 days of August increased ~18% YoY, representing a pick-
up from growth of ~7% in July 2017 and ~3% in 1Q. YTD up to mid-August,
dispatches rose 5.4% YoY, inching toward our estimate of 6.8% growth in FY18.
Demand pick-up is driven by re-stocking by power plants and growth in electricity
generation. Production has grown at ~22% in the first 15 days of August.
Financials Snapshot (INR b)
Y/E March
2017 2018E
Sales
755.7 789.4
EBITDA (ex-OBR) 122.6 149.5
NP
92.7 113.3
EPS (INR)
14.9 18.3
EPS Gr. (%)
-33.9 22.3
BV/Sh. (INR)
39.5 41.3
RoE (%)
37.8 44.2
RoCE (%)
33.1 45.0
P/E (x)
15.9 13.0
P/BV (x)
6.0
5.7
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
2019E
833.4
158.1
118.6
19.1
4.6
43.2
44.2
45.1
12.4
5.5
Executive wage negotiation done; VRS and mine closures can drive savings
The wage negotiation with executives was concluded, settling for a hike of 15%.
Non-executive wage negotiations are still ongoing, but considering inflation and
higher base, we believe there is scope for the hike to be below our estimate of
~18%. Natural attrition, VRS offer and cut in overtime will limit inflation in
employee cost. It would also close 37 unprofitable unground mines to reduce cost.
Jun-17 Mar-17 Jun-16
78.9
11.5
6.4
3.3
78.9
11.7
6.5
3.0
79.7
9.8
8.1
2.5
Other highlights
FII Includes depository receipts
Stock Performance (1-year)
Coal India
Sensex - Rebased
400
350
300
250
200
E-auctions in July/August have fetched good premiums, which would drive
improvement in realization 2Q onward.
The cap on expansion of EC limit under the automatic route is increased from
25% earlier to 40%. It would aid production growth from the existing mines.
Capex in 1Q was INR14b. Guidance is INR80b for FY18 (in-line).
Concerns priced in; volume growth accelerating; Re-iterate Buy
EBITDA (ex-OBR) is cut by ~12% to INR149b/INR158b for FY18E/19E on lower FSA
realization. We also cut OB removal adjustment charge, which, in turn, has led to
higher tax outflow, but marginal upgrade in PAT by 4%/2% to INR113b/118b for
FY18E/19E. Concerns about grade slippage and employee wage hikes are largely
priced in. Volume growth is accelerating on re-stocking. GST of 5% (earlier ~12%)
has provided some headroom for price hikes. There is scope to cut costs by
reducing inefficiencies/overheads. Resultantly, we revise the target EV/adj. EBITDA
multiple from 7.5x earlier to 8x. TP is revised to INR275. Re-iterate
Buy.
Sanjay Jain – Research Analyst
(SanjayJain@MotilalOswal.com); +91 22 6129 1523
Dhruv Muchhal – Research Analyst
(Dhruv.Muchhal@MotilalOswal.com); +91 22 6129 1549
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.