Coal India (COALIN) 307

Transcription

1 Result Update June 2, 2016 Rating matrix Rating : Buy Target : 350 Target Period : 12 months Potential Upside : 14% What's Changed? Target Changed from 375 to 350 EPS FY17E Changed from 25.7 to 24.5 EPS FY18E Introduced at 25.4 Rating Unchanged Quarterly Performance Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%) Net Sales 20, , , EBITDA 4, , , EBITDA (%) (243) bps 22.1 (146) bps PAT 4, , , #- Adjusted EBITDA excluding other Operating Income Key Financials Crore FY15E FY16E FY17E FY18E Total Op. Inc EBITDA Net Profit EPS ( ) Valuation summary FY15E FY16E FY17E FY18E P/E Target P/E EV / EBITDA P/BV RoNW RoCE Stock data Particular Amount Market Capitalization ( Crore) Crore Total Debt (FY16) Crore Cash and Investments (FY18E) ( Crore) Crore EV ( Crore) Crore 52 week H/L 447 / 271 Equity capital Crore Face value 10 Price performance (%) Return % 1M 3M 6M 12M Coal India NMDC Research Analyst Dewang Sanghavi dewang.sanghavi@icicisecurities.com Coal India (COALIN) 307 Healthy volume growth to sustain For Q4FY16, Coal India reported a muted set of numbers wherein topline, EBITDA and PAT came in below our estimates. However, despite a subdued performance, price hike taken by CIL augurs well For Q4FY16, coal production volume came in at million tonnes (MT), up 7.4% YoY while coal offtake came in at 143 MT, up 6.1% YoY. The blended realisation came in at /tonne, up 5.5% QoQ and down 5.9% YoY. E-auction sales volumes came in at MT, up 34.3% QoQ while e-auction realisation came in at /tonne, down 11.7% QoQ. Fuel supply agreement (FSA) volume for the quarter was MT while the FSA realisation came in at /tonne, up 5.7% QoQ, down 4.8% YoY The company reported an income from operation of crore, up 9.4% QoQ, down 0.1% YoY and below our estimate of crore. EBITDA (excluding other operating income) came in at crore, up 16.7% QoQ, down 9.4% YoY and lower than our estimate of crore. The resultant EBITDA margin came in at 23.6% (our estimate: 28%). Subsequently, the company reported a PAT of crore against our expectation of crore Coal India has approved a revision of coal prices with effect from May 30, 2016 of ~6.3% increase over current prices. This will be applicable to all subsidiaries of Coal India and NEC for regulated and non-regulated sectors. Due to this revision, CIL will earn additional revenue of ~ 3234 crore for the balance period of financial year i.e. from May 30, 2016 to March 31, 2017 Government thrust on augmenting output augurs well for company One of the key thrust areas of the new government has been on augmenting domestic coal production to ease the crippling fuel scarcity in the power sector. The Coal Ministry has highlighted CIL s production target at 1 billion tonnes by FY20 from the current level of 539 MT in FY16. Though the government s target is significantly optimistic and aggressive, it reinforces its strong focus on enhancing CIL s production. We believe it is too early to model such aggressive assumptions. However, easing of norms and simultaneous removal of offtake bottlenecks could help realise the full potential performance of CIL. Furthermore, most production growth is likely to be back-ended as projects get implemented. Going forward, we expect coal production volumes to grow at a CAGR of 8.0% in FY16-18E to 628 MT and sales volumes to grow at a CAGR of 8.1% in FY16-18E to 625 MT. Attractive dividend yield, dividend payout to remain healthy In FY16, CIL declared a healthy dividend of 27.40/share. We believe the dividend payout will remain healthy, going forward, as CIL possesses surplus cash on its books with modest capex requirements and generates good free cash flows. We expect the payout at ~92.0% (dividend per share 22.5) in FY17E, 88.7% (dividend per share 22.5) in FY18E. On strong footing; maintain BUY For Q4FY16, Coal India reported a muted performance on account of subdued blended realisations (down 5.9% YoY). Despite softer realisation, the price hike taken by CIL augurs well for it. Overall, we remain positive on the long term prospects of the company on the back of healthy traction in volume growth and lower cost of production. We value the stock at 7.5x FY17E adjusted EV/EBITDA and arrive at a target price of 350. We have a BUY recommendation on Coal India. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q4FY16 Q4FY16E Q4FY15 YoY (%) Q3FY16 QoQ (%) Comments Net Sales 20, , , , The topline came in lower than our estimate Other Income (including Other Op Income) 2, , , , The other income came in higher than our estimate Employee Expenses 7, , , , Raw Material Expenses , , Power & Fuel Contractual Expenses 3, , , , Overburden Removal adj Other Expenses 3, , , , EBITDA 4, , , , EBITDA came in lower than our estimate EBITDA Margin (%) bps bps EBITDA margin came in lower than our estimate Depreciation Interest Exceptional Item LP PBT 6, , , , Total Tax 2, , , , PAT 4, , , , PAT came in lower than our estimate Key Metrics Coal Production (million tonne) Production volume came in line with our estimate Coal Sales (million tonne) Sales volume came in line with our estimate Blended Realizations ( /tonne) * 1, , , , Blended realisation came in lower to our estimate EBITDA/tonne ( /tonne) * EBITDA/tonne came in lower than our estimate v Change in estimates FY17E FY18E ( Crore) Old New % Change New Comments Total Op. Income 84,453 85, ,179 Topline estimate marginally revised downwards for FY17E EBITDA 20,291 20, ,617 EBITDA estimate marginally revised downwards for FY17E EBITDA Margin (%) bps 23.0 EBITDA margin estimate maintained for FY17E PAT 16,243 15, ,040 PAT estimate revised downward for FY17E EPS ( ) EPS estimate revised downward for FY17E E-aucton volume E-Auction volume revised upwards for FY17E Overall Sales volume Overall sales volume downward revised for FY17E Assumptions Current Earlier Comments FY16 FY17E FY18E FY17E Total coal sales volume (million tonne) Sales volume estimate has been downward estimate for FY17E FSA coal sales volume (million tonne) FSA coal volume revised downwards for FY17E E-auction coal sales volume (million tonne) E-auction sales volume revised upwards for FY17E. Auction realisations are likely to remain subdued. We have estimated auction realisation of 1700/tonne each for FY17E and FY18E, *- EBITDA/tonne is inclusive of other operating income ICICI Securities Ltd Retail Equity Research Page 2

3 Key highlights of Analyst Meet The management is confident of achieving ~600 MT (up 11% YoY) volume target for FY17. Out of this, CIL intends to sell 120 MT of coal through the auction route vs. ~66 MT in FY16 (our estimate: 75 MT for FY17E, 80 MT for FY18E). CIL will auction 10 MT (8 MT for regulated, 2 MT for non regulated sector) every month through special auction to meet the demand of power plants a) not having PPAs, FSAs, ii) getting coal through tapering linkage and iii) lost mines due to cancellation by Supreme Court Out of total 65 MT of linkage coal for non-regulated sector, 13 MT of linkages expired in March As per the government s new policy, expired linkages quantity and also 25% of incremental production in previous year would be offered for auction. The process for auction of linkages to the non-power segment has commenced. In the current year, CIL will offer ~23.5 MT through this route. In 2019, all FSAs will expire. This will be added to the auction route Wage revisions for CIL s workmen would be applicable from July 1, 2016 while in case of executives, it is due from January 1, The management has said the outcome of wage negotiations would determine the quantum of increase in employee costs. We are building in 35% increase in wage bill in FY16-18 CIL expects to commission six new coal washeries by September Construction of eight more washeries would commence shortly after it receives environmental clearances. It has chalked out a capex plan of 7700 crore in FY17E At present, CIL recognises overburden removal (OBR) adjustment as an expense in the profit and loss statement. This is done to normalise stripping cost over the life of the mine. The management has indicated that, as per IND-AS, CIL will be unable to pass on overburden removal expenses (OBR) through P&L. Hence, there could a likelihood of tax liability for OBR passed through P&L in prior years. We await further clarity on the same During FY17, FSA sales to the power sector are expected to be ~450 MT, implying growth of 10% (409 MT in FY16) The management gave an update on the three critical rail lines that will increase evacuation capacity by ~200 MT. The Jharsuguda-Barpalli line in Odisha is expected to be completed by March Land acquisition for the km stretch at Talcher is pending, delaying the second phase of Odisha rail line. The first phase of rail line in Chhattisgarh is progressing well and is scheduled for completion by end of Similarly, the Tori to Shivpur line in Jharkhand would be completed by December 2017 ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Coal India (CIL), the mining major, is one of the largest coal producers in the world with coal production of 539 MT in FY16. The company supplies coal to sectors like power, steel, cement, defence, fertiliser, etc. As of March 31, 2013, CIL operated 462 mines in 81 mining areas across eight states in India, including 169 open cast mines, 270 underground mines and 23 mixed mines (that include both open cast as well as underground mines). CIL has seven wholly-owned coal producing subsidiaries and one mine planning and consultancy company. The company produces ~80% of India s total coal production and has a domestic market share of ~65% Government support to aid coal production growth, going forward After a few earlier years of stagnant production levels in the past, CIL has finally delivered a decent performance with FY16 coal production coming in at 539 MT, up 9% YoY. Going forward, to boost coal volumes, the government has eased norms. This is likely to help state-run CIL boost output. Going forward, we expect coal production volumes to grow at a CAGR of 8.0% in FY16-18E to 628 MT in FY18E. Exhibit 1: Coal production trend million tonne (MT) FY12 FY13 FY14 FY15 FY16E FY17E FY18E ICICI Securities Ltd Retail Equity Research Page 4

5 Sales growth mirrors coal production rate Coal sales growth for the company has mirrored the coal production growth rate. Coal sales grew at 9.2% in FY16 to MT (489 MT in FY15). Subsequently, we expect coal sales volumes to grow at a CAGR of 8.1% in FY16-18E to 625 MT. Exhibit 2: Coal sales volume trend 700 million tonne (MT) FY12 FY13 FY14 FY15 FY16E FY17E FY18E Sales Going forward, EBITDA margins likely to remain at ~23-24% We expect EBITDA margins to stay at ~23-24%, going forward. On an absolute basis, EBITDA is expected to grow at 8.7% CAGR in FY16-18E. Exhibit 3: EBITDA margins trend Exhibit 4: corresponding EBITDA/tonne* crore 23,500 21,500 19,500 17,500 15,500 13,500 11,500 9,500 7,500 % FY14 FY15 FY16 FY17E FY18E EBITDA EBITDA Margin per tonne FY12 FY13 FY14 FY15 FY16 FY17E FY18E EBITDA/tonne, *-including other operating income ICICI Securities Ltd Retail Equity Research Page 5

6 Healthy dividend payout ratio to sustain CIL has gradually increased the dividend payout from 43% in FY12 to 51% in FY13. In FY14, however, at the behest of the central government the company gave a one-time special dividend of 29/share while in FY15 the company gave a dividend of 20.70/share. Coal India for FY16 declared a dividend of 27.40/share. We believe the dividend payout will remain healthy, going forward, as the company possesses surplus cash on its books with modest capex requirements and generates good free cash flows. We expect the payout at ~92.0% (dividend per share 22.5) in FY17E, 88.7% (dividend per share 22.5) in FY18E. Exhibit 5: Earnings per share (EPS), dividend per share (DPS) & dividend payout ratio /share FY14 FY15 FY16E FY17E FY18E % EPS DPS Payout Ratio ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and valuation For Q4FY16, Coal India reported a muted performance on account of subdued blended realisations (down 5.9% YoY). Despite softer realisation the price hike taken by CIL augurs well for the company. Overall, we remain positive on the long term prospects of the company on the back of healthy traction in volume growth and lower cost of production. We have valued the stock at 7.5x FY17E adjusted EV/EBITDA and arrived at a target price of 350. We have a BUY recommendation on Coal India. Exhibit 6: Valuation matrix Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY15E FY16E FY17E FY18E ICICI Securities Ltd Retail Equity Research Page 7

8 Company snapshot Target Price: Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Source: Bloomberg, Company, ICICIdirect.com Research Key events May-11 Becomes the most valuable PSU with a market capitalisation of 2.51 lakh crore Aug-11 CIL's stock included in the Sensex Jan-12 CIL finalises a wage agreement for its 3.63 lakh strong non-executive work force by giving a 25% increase on gross wages as of June 30, The wage hike that Apr-12 S Narsing Rao takes over as Chairman of Coal India Mar-13 CIL signs a memorandum of understanding (MoU) with its administrative ministry Ministry of Coal (MoC) - for its key performance areas for FY14. MoC has fixed coal production & offtake targets of 482 million tonne (MT) and 492 MT May-13 Coal India board recommends a final dividend of 4.3 per equity share. This is in addition to the interim dividend of 9.7 per equity share paid during March Total dividend for FY14 stood at 14/share Jan-14 Board of directors of CIL approves an interim dividend of 29 per share. This is the highest ever interim dividend announced by the company Mar-14 CIL signs a memorandum of understanding (MoU) with its administrative ministry Ministry of Coal (MoC) - for its key performance areas for FY15. MoC has fixed coal production & offtake targets of 507 MT and 520 MT Oct-15 Coal India to set up a joint venture with Gail (India) Ltd, Rashtriya Chemical Fertilizers (RCF) and Fertilizer Corporation of India (FCL) for a coal gasification based fertiliser complex (ammonia urea complex) at Talcher along with power plant and associated facilities at Talcher unit of FCIL and to market its products Mar-16 Apr-16 Coal India declared a healhty dividend of 27.4/share for FY16 The Board of Directors approves giving up of performance incentive for supply of high grade coal (G5 and above) in the model fuel supply agreement for power and non power enitities to improve lifting of coal Top 10 Shareholders Rank Name Latest Filing Date % O/S Position Change 1 Government of India 31-Mar ,031.0M 0 2 Life Insurance Corporation of India 31-Mar M 0 3 The Vanguard Group, Inc. 31-Mar M 0.2M 4 ICICI Prudential Asset Management Co. Ltd. 29-Feb M 2.0M 5 Eastspring Investments (Singapore) Limited 31-Dec M -0.0M 6 BlackRock Institutional Trust Company, N.A. 31-Mar M 1.3M 7 Goldman Sachs Asset Management (India) Private Ltd. 31-Mar M 1.4M 8 Fidelity Management & Research Company 31-Mar M 0 9 SBI Funds Management Pvt. Ltd. 29-Feb M 1.1M 10 Franklin Advisers, Inc. 31-Oct M 0 v Source: Reuters, ICICIdirect.com Research Recent Activity Shareholding Pattern (in %) Dec-14 Feb-15 Mar-15 Jun-15 Sep-15 Promoter FII DII Others Buys Sells Investor name Value Shares Investor name Value Shares ICICI Prudential Asset Management Co. Ltd. 9.0M 2.0M HDFC Asset Management Co., Ltd M -3.7M APG Asset Management 8.1M 1.6M Birla Sun Life Asset Management Company Ltd M -2.5M Goldman Sachs Asset Management (India) Private Ltd. 6.2M 1.4M DSP BlackRock Investment Managers Pvt. Ltd M -2.5M JPMorgan Asset Management U.K. Limited 7.0M 1.4M BlackRock Investment Management (UK) Ltd. -5.9M -1.2M BlackRock Institutional Trust Company, N.A. 5.6M 1.3M Tata Asset Management Limited -3.4M -0.7M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary (Cons.) Profit and loss statement ( crore) (Year-end March) FY15 FY16 FY17E FY18E Net Sales Other Operating Income 2, , , ,461.4 Total Operating Income Growth (%) Total Operating Expenditure EBITDA Growth (%) (1.8) Depreciation Interest Other Income Exceptional Item -5.0 (41.5) - - PBT Total Tax PAT Growth (%) Adj EPS ( ) Balance sheet ( crore) (Year-end March) FY15 FY16 FY17E FY18E Liabilities Equity Share Capital 6, , , ,316.4 Reserve and Surplus 34, , , ,220.5 Total Shareholders funds Total Debt Minority Interest Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block CWIP Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Current Liabilities Provisions Current Liabilities & Prov Net Current Assets others Application of Funds Cash flow statement ( crore) (Year-end March) FY15 FY16 FY17E FY18E Profit after Tax Add: Depreciation Add: Interest (Inc)/dec in Current Assets Issue/(Buy back) of Equity Inc/(dec) in loan funds Interest Paid Dividend paid & dividend tax Others CF from financing activities Net Cash flow Opening Cash Closing Cash Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) Adj EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) Adj RoE Adj RoCE RoA Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Metals & Mining) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) ROCE(%) ROE(%) Company ( ) TP ( ) Rating ( Cr) FY15 FY16 FY17E FY15 FY16 FY17E FY15 FY16 FY17E FY15 FY16 FY17E FY15 FY16 FY17E Coal India Buy Hindalco Industries Hold Hindustan Zinc Hold JSW Steel Hold NM NMDC Hold SAIL Sell NA NA Vedanta Hold Tata Steel Hold NM NM NA ICICI Securities Ltd Retail Equity Research Page 10

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

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ICICI Securities has received an investment banking mandate for disinvestment in Coal India Ltd. This update is prepared on the basis of publicly available information. ICICI Securities Ltd Retail Equity Research Page 12