Coal India's Q2FY19 results (Outperformer) - Cost in control; volume growth to aid earnings

Q2FY19 result- Cost control, high prices offset lower e-auction volumes

Coal India reported in-line adj EBITDA ex-OBR of Rs. 51.6bn (IDFCe: Rs 51.2bn). High coal prices (up 13% yoy to Rs1,503/t) and volumes (up 4.7% yoy to 138mt) along with lower CoP due to lower employee cost (down 3% yoy to Rs1,237/t) led EBITDA ex-OBR adj to increase 3x on a yoy basis. Results could have been much better if it would have not reduced e-auction volumes (down 24% yoy to 18mt).

• Coal sales volume at 138mt, was up 4.7% yoy with 85% of coal being supplied under FSA (79.5% in Q2FY18) leading to adverse sales mix. High priority to power sector led coal volume under FSA increasing by 12% yoy to 117mt while e-auction volumes fell 24% yoy to 17.7mt.
• Coal realization under FSA stood at Rs 1,308/t, up 7% yoy reflecting the effect of price hikes taken in January 2018. Continued scarcity and high demand of coal in e-auction resulted in higher price to Rs. 2,592/t, up 61% yoy and up 8% qoq. Employee cost were down 2% yoy (7% qoq) to Rs. 89.5bn.
• COAL has changed its reporting methodology of coal quality variance provisions wherein company reported provision on gross basis (earlier net of reversals) and reversals (Rs4.4bn) have been classified under other income. We have adjusted the same while calculating EBITDA. As a result, Adj. EBITDA ex-OBR stood at Rs51.6bn, 4x yoy and EBITDA/t of Rs374, 3.8x yoy. Cost ex-employee stood at Rs587/t, flat yoy despite increase in fuel cost which is a positive.

Key Positives: Higher volume, coal prices under e-auction, lower CoP

Key Negatives: Lower e-auction volumes

Impact on financials: FY19 PAT increased by 5% due to higher other income

Valuation & view: Reiterate Outperformer with revised TP of Rs355

We factor in 6% yoy volume growth in FY19 to 615mt. (1HFY19 volume growth of 8% yoy). Higher e-auction prices is expected to offset lower e-auction volume, thus will have a minimal effect on our FY19 EBITDA. Volume growth, higher FSA & e-auction coal prices and cost control will lead to 46% yoy increase in EBITDA in FY19 to Rs297bn. We value Coal India at 6.5x FY20E EV/EBITDA (earlier 7.0x) and arrive at a TP of Rs355 (earlier Rs378). The stock is available at a dividend yield of ~8% (DPS of Rs22 in FY19E). Reiterate Outperformer.