MOSL: COAL INDIA (Buy)-Last of the concerns is behind with wage settlement-Many levers to drive upside

​COAL INDIA: Last of the concerns is behind with wage settlement; Many levers to drive upside: Maintain Buy

(COAL IN, Mkt Cap USD26.7b, CMP INR286, TP INR335, 17% Upside, Buy)

Wage hike to impact earnings by 6% in FY19E

• Coal India (COAL) announced an annual impact of INR56.7b on account of the wage hike after it signed the National Coal Wage Agreement-X on 10th October 2017 for a period of five years, from 1st July 2016 to 30th June 2021.
  
• According to our calculations, the average hike of 22% is higher than our estimate of 18%. Thus, we are raising our estimate for the annual wage bill by INR20b to INR364b in FY18E, and by INR12.3b to INR362b in FY19E. This will impact EBITDA and PAT by 11% in FY18E and by 6% in FY19E.
  

Worst is behind

• COAL's stock performance has been impacted on many counts over the last two years, e.g. grade slippage, e-auction price decline, deceleration in volume growth and uncertainties around the wage hike.
  
• The impact of grade slippage was fully reflected in 1QFY18 (Exhibit 1). E-auction coal prices have started inching up (Exhibit 2). Volume growth (Exhibit 3) too has picked up due to the end of destocking (Exhibit 4), demand acceleration, and import substitution. With the settlement of the wage hike, we believe the worst is behind for the stock.
  

Many levers that can drive upside to our estimates

• We now look forward to many upsides. COAL is planning to manage its costs by closing its loss-making underground mines, the contribution of which to overall volumes is insignificant, but losses are meaningful.
  
• COAL is also planning to lower operating costs by reducing overtime and VRS. With clarity on the impact of the wage hike, COAL can look forward to a price hike. We are not factoring in any price hike in our models.