Coal India's Q2FY18 results (Downgrade to Neutral) - Awaiting price hikes under FSA

Q2FY18 result highlights- Coal under FSA in losses

• Coal India (COAL IN) reported EBITDA ex-OBR of Rs 12.9bn, up 39% yoy, driven by higher volumes, lower operating cost and higher e-auction coal prices. Overall, it recorded EBITDA/t of Rs98, up 22% yoy. However, we infer that COAL suffered EBITDA loss of Rs57/t by selling coal under FSA and company is unable to take price hikes yet.
• Coal realization under FSA stood at Rs 1,224, up 2% qoq but down 5% yoy while e-auction price came in at Rs 1,614, up 2% qoq and 20% yoy. EBITDA/t of FSA coal stood at -Rs57 while that of e-auction coal stood at Rs333. Realisation for washed coking coal stood lower at Rs5,900/t (Q1FY18: Rs10,729) as the company reversed a part of gain after finalizing prices with SAIL at ~Rs8,000/t. 
• COAL recorded arrears of 15 months (~Rs23bn) for non-executive employees after agreeing for 20% hike for non-executives in October 2017. As a result, employee cost stood at Rs91.6bn, up 9% yoy. Despite that, COAL’s coal cost fell 3% yoy to Rs1,281/t which is a positive.
• Other income, at Rs6.1bn, fell 49% qoq. We believe that this does not include any write back of provisions, rental income, any liquidity damages etc but only interest & dividend income. During Q1FY18, company reported other income of Rs12bn which included ~Rs5bn of liabilities write back.

Key Negatives: Lower other income; high employee cost and lower washed coal prices; no announcement of increase in FSA coal prices

Key Positives: Increase in coal prices under e-auction, lower CoP

Impact on financials: Reduce FY18E/FY19E/FY20E profits by 20%/17%/17% to factor in higher employee cost, lower other income

Valuation & view: Downgrade to Neutral with TP of Rs290

We still believe that COAL will take price hikes under FSA within Q3FY18E and factors in hike of ~Rs100/t. E-auction prices are set to rise further from Q2FY18 average. However, we cut our earnings to factor in low other income and high employee cost. With cut in earnings, we expect COAL to provide DPS of Rs12.7 in FY18E which can increase to Rs17 in FY19E. We revise downward our TP to Rs290, valuing it at 7.0x FY20E EV/EBITDA. With limited upside even after assuming price hikes under FSA, we downgrade the stock to Neutral.