Management Speak: Coal India (Outperformer) - Prices to boost profits
We present key takeaways from our meeting with Coal India’s (COAL) management recently, which was to gauge the impact of change in pricing methodology from April 2018, trend in e-auction coal prices and overall coal volumes. In this note, we remain positive on COAL and raise our FY18E/FY19E/FY20E EBITDA by 13%/7%/4%, respectively, to factor in higher coal prices. We reiterate Outperformer on the stock with a revised target price of Rs370, valuing COAL at 7.0x FY20E EV/EBITDA.
New pricing system (April 2018) unlikely to impact FSA coal prices: In January 2018, COAL increased FSA coal prices by ~Rs110/t. The company expects to effect a new FSA coal pricing methodology from April 2018, which would be based on per unit calorific value of coal (Rs/Kcal) instead of the band system used currently. While we were apprehensive that this change would lower FSA coal prices, management is confident that there would be no adverse impact on coal prices. We have thereby further raised our FY19E FSA coal prices to Rs1,328/t (earlier Rs1,318/t), which would inflate EBITDA by Rs4.9bn in FY19E and Rs5.2bn in FY20E.
E-auction coal prices to remain high: During Q4FY18, average e-auction coal prices was Rs1,998/t. Management guided that the coal market is a seller’s market and thus expects the high e-auction prices to sustain. Currently, average e-auction prices fetch ~55% premium over notified prices, implying Q4FY18 e-auction price of ~Rs2,100/t. We have also raised our average e-auction coal price to Rs2,000/t in FY19E and FY20E each from Rs1,925/t earlier.
Reiterate Outperformer with a revised target price of Rs370: We estimate 24% EBITDA CAGR over FY17-20E underpinned by the absence of adverse impact on FSA coal prices post COAL’s new pricing methodology, sustenance of higher e-auction coal prices and 5% coal volume CAGR during FY18-20E. The commissioning of a critical railway line (Jharsuguda-Barpali-Sardega) in March 2018 will further aid offtake of 35mtpa, in our view. We value COAL at 7.0x FY20E EV/EBITDA to arrive at our revised target price of Rs370 (earlier Rs338). A dividend yield of 6-7% (DPS of Rs17.5 in FY18E and Rs22 in FY19E) would restrict any major downside (record date for interim dividend is 15 March 2018), in our view. 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.
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