Coal India's Q3FY18 results (Outperformer) - CoP in control; higher coal prices to drive earnings

Q3FY18 result- Higher e-auction coal price and lower cost inflates EBITDA

• Coal India (COAL IN)’s Q3FY18 reported better-than-expected results with EBITDA ex-OBR of Rs 55.4bn, up 17% yoy. This was driven by higher e-auction coal prices, higher coal volumes and lower operating cost, partly offset by lower FSA coal prices. Overall, it recorded EBITDA/t of Rs363, up 10% yoy.
• Coal realization under FSA stood at Rs 1,182/t, down 8% yoy and 3% qoq due to liquidation of inventory which has low calorific value and higher quantity offered to low-priced power sector. E-auction price came in at Rs 1,998/t, up 28% yoy and 24% qoq. Higher e-auction prices offset lower FSA coal prices. As a result, blended coal prices, at Rs1,359/t, were up 2% qoq though still down 2% yoy. 
• Employee cost, at Rs87.5bn, was up 6% yoy after finalisation of wage contract with non-executives in October2017. Cost ex-employee stood at Rs482/t, down 9% yoy due to lower contractual expenses and write back of provisions. As a result, despite higher employee cost and lower blended coal realisation, EBITDA/t stood at Rs363, up 10% yoy.

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

Key Negatives: Lower FSA coal prices

Impact on financials: Increase FY18E/FY19E/FY20E profits by 10%/7%/6% to factor in higher e-auction coal prices, lower employee cost partially offset by lower FSA coal prices due to grade slippages

Valuation & view: Reiterate Outperformer with TP of Rs338

The benefits of increase in coal prices under FSA will start accruing from Q4FY18. Cost control, higher e-auction coal prices provides a much needed relief for Coal India which will more than offset any lower FSA coal realisation on account of grade slippage from FY19E onwards. The higher employee cost on account of wage revision for non-executives has now been factored in.  We value Coal India at 7.0x FY20E EV/EBITDA and arrive at a TP of Rs338. The stock is available at a dividend yield of ~6% (DPS of Rs17.5 in FY18E and Rs22 in FY19E), restricting any major downside. Reiterate Outperformer.