MOSL: COAL INDIA (Buy)-Dragged by operating leverage-Many concerns still remain

​Coal India: Dragged by operating leverage; Many concerns still remain; Maintain Buy

(COAL IN, Mkt Cap USD23.1b, CMP INR239, TP INR316, 32% Upside, Buy)

• Coal India's (COAL) 1QFY18 revenue rose 3.4% YoY to INR184b, driven by 3.6% growth in off-take. Average revenue was unchanged YoY, in line with estimates. However, there was a miss at average realization by 1% (-3% YoY) for FSA and by 7% (+1% YoY) for E-auction. It was the favorable mix of E-auction off-take (27.3mt v/s est. of 22.7mt) that protected average revenue.
• EBITDA (ex-OBR) declined 31% YoY to INR26.7, missing our estimates by 25%. COAL intentionally destocked 19mt of inventory by reducing production 5.4% YoY to 119mt. Since its fixed costs are high, negative operating leverage dragged the company's operating performance.
• Adjusted PAT declined 15% YoY to INR23.5b.

Many concerns still remain; Maintain Buy

• Volume growth has suffered due to slower growth in energy demand, productivity gains in electricity generation, improvements in the quality of coal and partial substitution by petcoke. We expect volume growth to pick up gradually on import substitution and higher energy demand.
• Wage bill increased 10% YoY in 1QFY18, but the negotiations with labor unions are still pending. It appears that the full impact of grade slippages is reflected in 1QFY18. COAL is auctioning linkages frequently, which may cannibalize the more profitable E-auction volumes. We will review our estimates after the analyst meet.