Coal India's Q2FY20 results (Outperformer) - Awaiting volume growth; inexpensive valuation
Q2FY20 result- lower volumes offset higher realisation
Coal India reported adj EBITDA ex-OBR of Rs. 42.5bn (IDFCe: Rs 34.9bn), down 17% yoy due to 11% decline in volumes partly offset by higher realisation. However, the beat on estimates was due to higher FSA realisation/t of Rs1,438 (5% higher than IDFCe) and lower employee cost (Rs90.7bn vs IDFCe: Rs95bn).
- Coal sales volume at 122mt, was down 11% yoy with ~85% of coal being supplied under FSA (85% in Q2FY19). Volume under FSA stood at 104mt (down 11% yoy) and e-auction volumes stood at 15.5mt (down 12% yoy).
- Coal realisation under FSA stood at Rs1,438/t, up ~10% yoy (5% qoq) . Though Coal India has not increased any prices under long term coal supplied under FSA but with increase in proportion of coal supplied under linkage auction (fetches ~20% premium over traditional FSA), blended FSA realisation was up. However, due to weak demand, realisations under E-auction declined 22% yoy to Rs2,019 (down 6% qoq). Overall, blended realisation was higher by ~5% yoy to Rs1,551/t.
- CoP ex-employee cost, at Rs577/t, up 2% yoy due to volume de-growth. Employees cost, at Rs90.7bn, was up 1% (vs up 3% in Q1FY20) due to lower retirement benefit obligations as per Actuarial calculation. As a result, EBITDA/t stood at Rs347, down 7% yoy.
- Other income stood at Rs16.3bn, up 1% yoy (includes income tax refund of Rs2bn).
Key Positives: Higher FSA realisation, lower employee cost
Key Negatives: Lower volumes
Impact on financials: Increase FY20E/FY21E EBITDA by 8%/6% due to higher blended FSA realisation
Valuation & view: Reiterate Outperformer with revised TP of Rs270
We expect CIL’s volumes to return to growth from December and expect volumes of 598mt (down 1.5% yoy) in FY20E. CIL has opted for reduced tax rate to 25-26% (already factored). With increase in earnings, our target price is revised upwards to Rs270/sh (earlier Rs246/sh), valuing the company at 5.0x FY21E EV/EBITDA. At CMP, the stock is trading inexpensive at 3.7x FY21E EV/EBITDA. GoI offloading stake in CIL through ETFs pose risk of increased supply of stock, thereby keeping stock under pressure. Reiterate Outperformer.
Coal India is engaged in the identification, exploration, and production of coal in India. Co. offers coking coal primarily for use in steel making and metallurgical industries, and for hard coke manufacturing; semi coking coal for use as blend-able coal in steel making, merchant coke manufacturing, and other metallurgical industries; NLW coking coal for use in power utilities and non-core sector consumers; non-coking coal for use as thermal grade coal for power generation, as well as for cement, fertilizer, glass, ceramic, paper, chemical and brick manufacturing, and for other heating applications.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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