Coal India's Q3FY20 results (Outperformer) - Resumption of volume growth; attractive div yield

Q3FY20 result- lower volumes hit earnings

Coal India reported adj EBITDA ex-OBR of Rs. 61.8bn (IDFCe: Rs 61.5bn), down   22% yoy due to 8% yoy decline in volumes, adverse product mix and higher mining cost.

• Coal sales volume at 142mt, was down 8% yoy with ~90% of coal being supplied under FSA (88% in Q3FY19). Volume under FSA stood at 128mt (down 6% yoy) and e-auction volumes stood at 9.8mt (down 33% yoy).
• Coal realisation under FSA stood at Rs1,411/t, up ~6% yoy. 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. Due to shortage of coal in e-auction market, average e-auction prices jumped to Rs2,623/t, up 30% qoq but down 8% yoy. Overall, blended coal realisation was flat yoy at Rs1,523/t.
• CoP ex-employee cost, at Rs506/t, up 3% yoy due to volume de-growth. Employees cost, at Rs98.4bn, was up 3% yoy. Employee cost keeps on fluctuating on a quarterly basis but FY20 employee cost should be flat yoy. As a result, EBITDA/t stood at Rs437, down 16% yoy.
• Other income stood at Rs14.1bn, up 21% yoy.

Key Positives: Higher e-auction realisation

Key Negatives: Lower volumes, adverse product mix

Impact on financials: Lower volume offset by higher prices; no change in EBITDA

Valuation & view: Reiterate Outperformer with TP of Rs270

Though FY20 volume is expected to be weak (down 3% yoy to 590mt) but the positive is that its volume has returned to growth path from Dec 2019 onwards (Jan sales volume growth was 7% yoy). With no downside risk of FSA prices and having been already factored in the possibility of weakness in e-auction prices, we do not see any risk of downward revision in financial numbers. Added to it, we expect interim dividend of Rs15/sh+ in March with full year DPS of Rs20, providing div yield of ~11%. After lowering corporate tax rate earlier, the removal of DDT provides additional cash flows to the company. We reiterate our Outperformer rating with a target price of Rs270/sh, valuing the company at 5.0x FY21E EV/EBITDA. At CMP, the stock is trading inexpensive at 2.9x FY21E EV/EBITDA. Key risk: GoI offloading stake in CIL through ETFs, thereby increased supply of stock, keeping stock price under pressure. Reiterate Outperformer.