Coal India's Q3FY19 results (Outperformer) - Earnings intact, high div yield & inexpensive valuation

Q3FY19 result- Higher realisation and cost control boost EBITDA

Coal India reported higher than expected adj EBITDA ex-OBR of Rs. 79.7bn (IDFCe: Rs 64.2bn), up 50% yoy. The beat was on account of better than expected realisation under both FSA (due to higher premium in coal supplied via linkage auction and favourable product mix) and e-auction. EBITDA/t stood at Rs518, up 49% yoy. We note that the coal quality has improved which led the company to write back the provisions made earlier on grade slippage (write back ~Rs24.2m)

• Coal sales volume at 154mt, was up 1% yoy with 88% of coal being supplied under FSA (80% in Q3FY18) leading to adverse sales mix. High priority to power sector led coal volume under FSA increasing by 12% yoy to 136mt while e-auction volumes fell 44% yoy to 14.7mt.
• Coal realization under FSA stood at Rs 1,334/t, up 13% yoy (up 2% qoq) reflecting the effect of price hikes taken in January 2018.  Moreover, the increase in premium on coal supplied via linkage auction boosted prices. Realisations under E-auction was higher by 42.6% qoq at Rs2,847/t (up 10% qoq) due to scarcity of  coal.
• CoP ex- employee cost was down 2% yoy to Rs492/t. This is the 2nd consecutive year of fall in cost of mining on a per tonne basis (Q3FY17: Rs527/t, Q3FY18: Rs503/t). High employee cost (Rs95.2bn, up 9% yoy and 6% qoq) includes provision of ~Rs3.5bn on account of lower interest on gratuity (interest rate reduced to 7.71% from 8.15%).

Key Positives: Higher realisation, lower ex-employee CoP

Key Negatives: Lower e-auction volumes, higher employee cost

Impact on financials: PAT up by 1% in FY19E and 4% in FY20E due to higher prices and lower cost partly offset by lower volume; Introduce FY21 Estimates

Valuation & view: Reiterate Outperformer with revised TP of Rs335

Volume growth is expected to be back on track from February 2019 after two months of yoy decline. Q4 earnings is expected to be driven by higher volume, in particular e-auction volume, incentives and lower employee cost. We expect FY19 DPS of Rs22 (~10% div yield) including interim dividend of Rs7.25 paid in December 2018. The stock is trading inexpensive at 3.7x FY20E EV/EBITDA and 6.9x FY20E P/E with RoE of 78%. We reduce EV/EBITDA multiple from 6.5x to 6.0x and as a result, revised target price to Rs335 (Rs355). Reiterate Outperformer. ​