Coal India's Q4FY19 results (Outperformer) - Earnings intact; inexpensive valuation

Q4FY19 result- Higher realisation and cost control boost EBITDA

Coal India reported adj EBITDA ex-OBR of Rs 104.2bn (IDFCe: Rs 105.6bn), up 3.7% yoy. EBITDA could have been higher but was offset by higher employee cost which included one-time cost of ~Rs6.5bn (arrears related to new pension scheme introduced w.e.f Oct 2017). Year-end performance incentive income stood at ~Rs8bn.

• Coal sales volume at 164mt, was up 2.9% yoy with 87% of coal being supplied under FSA (79% in Q4FY18) leading to adverse sales mix. High priority to power sector led coal volume under FSA increasing by 13% yoy to 142mt while e-auction volumes fell 43% yoy to 16.7mt.
• Coal realization under FSA stood at Rs 1,404/t, up 3% yoy (up 5% qoq). This was due to arrest of grade slippages and the increase in premium on coal supplied via linkage. Realisations under E-auction was higher by 30% yoy at Rs2,754/t (down 3% qoq).
• CoP ex- employee cost was down 4% yoy to Rs454/t. This is the 2nd consecutive year of fall in cost of mining on a per tonne basis (Q4FY17: Rs598/t, Q4FY18: Rs475/t). Employees cost at Rs107bn, were up 15% yoy (12% qoq) due to provision of arrears of new pension scheme of Rs6.5bn and higher provisioning of retirement benefits on account of lower interest on gratuity and higher leave encashment and bonus payout at end of the year. As a result, EBITDA/t stood at Rs637 (Q4FY18: Rs633).

Key Positives: Higher FSA realisation, lower ex-employee CoP

Key Negatives: Lower e-auction volumes, higher employee cost, no dividend

Valuation & view: Reiterate Outperformer with revised TP of Rs315

COAL’s volume growth has been muted so far in FY20 (April volume was up 2.6% yoy). E-auction prices, too, are trending southwards but factored in our numbers. Employee cost remain high and mining cost ex-employee may not decrease further. With limited EBITDA growth (3% yoy in FY20e), fear of increasing share supply by further reducing Government of India’s stake (GOI’s holding reduced by 7.6% in FY19 to 71.0%), we revise downward our valuation multiple from 6.0x to 5.5x. Accordingly, our TP is revised downwards to Rs315 (earlier Rs335). Though the company can still pay final dividend for FY19 before AGM, we have now not factored in the same (have paid interim div of Rs13.1). We expect FY20 DPS of Rs20 (~8% div yield) and the stock is trading inexpensive at 4.5x FY20E EV/EBITDA. Reiterate Outperformer. ​