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MOSL: COAL INDIA (Buy)-Gaining from price hike and strict control over costs

Coal India: Gaining from price hike and strict control over costs; Valuations attractive; Maintain Buy

(COAL IN, Mkt Cap USD19.6b, CMP INR223, TP INR338, 52% Upside, Buy)

 

• Revenues increased 16% YoY to ~INR250b, as against our est. of INR239b, led by (a) FSA realization increase of ~13% to INR1,334/t, as against our est. of INR1,310/t, (b) e-auction realization increase of 43% (10% QoQ) to INR2,847/t, as against our est. of INR2,500/t, and (c) volume increase of ~2% to 154.1mt (volume mix was weak).
• Cash cost (ex-OBR) was flat YoY at INR1,001/t. Adj. EBITDA (ex-OBR) increased 44% YoY to ~INR79b, driven by higher realization and flattish cost.
• There is a change in accounting of provisions from gross to net basis. The provisions have decreased with corresponding decrease in revenue and other income. 1QFY19 and 2QFY19 financials have also been restated, which boosted EBITDA, but with no impact on PAT.
• PAT increased 52% YoY to INR45.6b, beating our est. of INR35.7b, driven by better-than-expected FSA realization and lower cost.

Valuations attractive; Maintain Buy

• COAL has managed to keep cost under control despite inflationary pressure from the diesel price increase. Cash cost (ex-OBR) declined by ~5% YoY in 9MFY19. While at the same time, ~10% YoY increase in realization (price hike and increase in evacuation charges) boosted earnings. Adj. EBITDA and PAT doubled YoY in 9MFY19.
• Inventory levels at power plants have started to improve, which should reduce pressure on COAL to give priority supply to the power sector and should thereby aid e-auction volumes.
• Our adj. EBITDA estimate is upgraded by ~14% to INR275b for FY19 due to change in provision accounting. PAT estimate is raised by ~6% to INR169b due to better-than-expected performance in 3Q.