17-Nov-14 17-Dec-14 17-Jan-15 17-Feb-15 17-Mar-15 17-Apr-15 17-May-15 17-Jun-15 17-Jul-15 17-Aug-15 17-Sep-15 17-Oct-15 Coal India Ltd. Subdued e-auction realization impacted profitability Coal India Ltd. (Coal India), the largest coal miner in the world reported a mixed set of numbers for Q2 FY16. The company reported a consolidated topline of Rs. 169,575.9mn, which was in-line to our expectation. Lower charge towards over burden removal (OBR), mainly led to a lower than expected operating expenditure. Consequently, consolidated EBITDA stood at Rs. 24,761.2mn as against to our expectation of Rs. 23,044.6mn. Further, bottomline stood at Rs. 25,190.4mn, which was in-line to our expectation. Q2 FY16 Result Analysis: Top-line growth driven by better than expected realization: On the back of better than expected coal realization, Coal India s top-line increased by 8.2% Y- o-y to Rs. 16,957.6mn. Blended realization declined by 2% Y-o-Y as compared to our expectation of a fall of 4.9% Y-o-Y. Coal realization from sales through fuel supply agreement (FSA) increased by 2.7% Y-o-Y while, e-auction sales realization crashed by 28.4% Y-o-Y. FSA and e-auction sales volume increased by 7.2% and 39.1% Y-o-Y, respectively, representing 84.6% and 12.1% of the total coal sales volume. Sequentially, top-line declined by 10.5%, on the back of lower offtake volume and sales realization. Lower charges towards OBR led to an expansion in EBITDA margin: During the quarter, the company witnessed a 38.6% and 3.3% Y-o-Y rise in contractual and employee expenses, however, these were partially offset by lower OBR expenses. Consequently, total operating expenses increased by 6.4% Y-o-Y. But as percent of net sales, operating expenses declined by 140bps Y-o-Y to 85.4%. As a result, EBITDA increased by 19.6% Y-o-Y to Rs. 24,761.2mn, with expansion in margin by 140bps to 14.6%. Sequentially, EBITDA declined by 43.5% with 8.5ppts contraction in margin. EBITDA per tonne stood at Rs. 203.1, representing a growth of 8.4% Y-o-Y. Lower tax incidence lifted PAT: Other income declined by 2.9% Y-o-Y, which was partially offset by lower effective tax rate (which declined by over 4ppts Y- o-y). As a result, bottom-line increased by 15.2% Y-o-Y to Rs. 25,190.4mn with a 90bps Y-o-Y expansion in PAT margin to 14.9%. Sequentially, bottom-line plunged by 33.5%. As on H1 FY16 end, Coal India s cash & cash equivalent level increased by 12.6% (as compared to FY15 end) to Rs. 61,892.9mn. Subdued e-auction realization a concern, while disinvestment pressure continues: On account of subdued domestic demand and lower international coal prices, e-auction sales realization crashed by 28.4% Y-o-Y to Rs. 1,788 per tonne. According to the management, this was basically due to increased domestic coal supply. We expect, continued pressure on the e-auction pricing in H2 FY16, however, it is likely to rebound in FY17 with the revival in demand. The government is planning to divest 10% of its stake in the company, which is likely to put short-term pressure on the stock price. Valuation: We anticipate Coal India s coal production to increase by 9% to 538.6mn tonnes in FY16 as against the company s target production of 548mn tonnes. On coal offtake front, Coal India is expected to report a growth of 10% to 537.9mn tonnes. Taking into consideration the fall in e-auction realization, we have lowered the revenue from e-auction mode be around 14.8% in FY16. We foresee a minimal impact on the top-line due to lower e-auction price, but we have lower the FY16E bottom-line by 12.4%. At CMP of Rs. 331, Coal India s share is trading at TTM P/E multiple of 15.1x. Based on DCF valuation methodology, we arrive at a target price of Rs. 388 per share, reflecting a return of 17.1%. Thus we reiterate our rating on the stock. Q2 FY16 Snapshot: Particulars (Rs. mn) Q2 FY16 Q1 FY16 Q2 FY15 Q-o-Q (%) Y-o-Y (%) Net Sales 169,575.9 189,557.5 156,779.8-10.5% 8.2% EBITDA 24,761.2 43,819.1 20,695.7-43.5% 19.6% Adjusted PAT 25,190.4 37,869.3 21,875.3-33.5% 15.2% EBITDA Margin (%) 14.6% 23.1% 13.2% (851) bps 140 bps Adjusted PAT Margin (%) 14.9% 20.0% 14.0% (512) bps 90 bps Rajnath Yadav Board line: +91 22 6707 9999; Ext. 975 rajnath.yadav@choiceindia.com Rating Matrix CMP (Rs.) 331 Rating Relative Capital Market Strength Buy Target price (Rs.) 388 Target period 12 months Upside potential 17% 52 week H/L (Rs.) 447.3 / 300.8 Face value (Rs.) 10 Category Sector Large Cap Coal Shareholding Pattern as on 30th Sept. 2015 Particulars Sept-15 Jun-15 Mar-15 Sep-14 Promoters 79.7% 79.7% 79.7% 89.6% FIIs 9.0% 9.2% 9.0% 5.4% DIIs 8.4% 8.6% 8.8% 3.0% Non institutions 2.9% 2.6% 2.5% 2.0% Consolidated Financial Snapshot (Rs. bn) Projections FY15 FY16E FY17E FY18E FY19E FY20E Revenue 720 767 933 1,052 1,266 1,532 EBITDA 152 154 205 235 280 337 PAT 137 141 182 208 247 295 EBITDA (%) 21.1% 20.1% 22.0% 22.3% 22.1% 22.0% PAT (%) 19.1% 18.4% 19.5% 19.8% 19.5% 19.2% EPS 22 22 29 33 39 47 BVPS 64 75 90 106 126 149 RONW (%) 33.1% 32.0% 35.0% 33.7% 33.7% 34.0% P/E 14.8 11.5 10.0 8.5 7.1 P / BVPS 4.4 3.7 3.1 2.6 2.2 EV/EBIDTA 8.2 5.8 4.8 3.5 2.4 130 125 120 115 110 105 100 95 90 85 Coal India Ltd. Sensex 1
Q2 FY16 Quarter Actual vs. Estimates: Particular (Rs. mn) Q2 FY16 Actual Q2 FY16 Estimates Variance (%) Reason / Comments Net Sales 169,575.9 164,599.2 3.0% Top-line came in-line with our estimate EBITDA 24,761.2 23,044.6 7.4% Lower OBR adjustments, mainly led to a better than expected EBITDA PAT 25,190.4 25,034.9 0.6% Bottom-line came in-line with our estimate Q2 FY16 Quarter Performance: Particulars (Rs. mn) Q2 FY16 Q1 FY16 Q2 FY15 Q-o-Q (%) Y-o-Y (%) Net Sales 169,575.9 189,557.5 156,779.8-10.5% 8.2% Total Operating Expenditure (144,814.7) (145,738.4) (136,084.1) -0.6% 6.4% EBITDA 24,761.2 43,819.1 20,695.7-43.5% 19.6% Depreciation (5,864.0) (5,575.4) (5,363.2) 5.2% 9.3% EBIT 18,897.2 38,243.7 15,332.5-50.6% 23.2% Interest Expenses (15.2) (40.3) (10.7) -62.3% 42.1% Other Income 19,636.4 20,094.5 20,221.4-2.3% -2.9% Exceptional Items 247.5 (225.9) 48.1-209.6% 414.6% Profit Before Tax (PBT) 38,765.9 58,072.0 35,591.3-33.2% 8.9% Tax Expenses (13,328.0) (20,428.6) (13,667.7) -34.8% -2.5% Adjusted PAT 25,190.4 37,869.3 21,875.3-33.5% 15.2% Basic EPS (Rs.) 4.0 6.0 3.5-33.4% 15.3% Diluted EPS (Rs.) 4.0 6.0 3.5-33.4% 15.3% EBITDA Margin (%) 14.6% 23.1% 13.2% (851) bps 140 bps Adjusted PAT Margin (%) 14.9% 20.0% 14.0% (512) Bps 90 bps 2
Subsidiary-wise Coal Production and Offtake Volume: Quarterly Coal Production/Offtake Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Coal Production (mn tonnes) Eastern Coalfields Ltd. 7.2 10.8 13.3 9.1 5.9 Bharat Coking Coal Ltd. 7.6 8.5 9.9 8.8 7.9 Central Coalfields Ltd. 11.7 14.9 19.2 12.6 12.2 Northern Coalfields Ltd. 14.3 18.7 24.1 18.3 17.0 Western Coalfields Ltd. 7.2 10.8 12.5 10.3 8.1 South Eastern Coalfields Ltd. 26.8 35.8 38.1 31.2 28.1 Mahanadi Coalfields Ltd. 27.6 32.1 34.3 31.1 29.0 North Eastern Coalfields Ltd. 0.0 0.2 0.5 0.1 0.0 Total Coal Production 102.4 131.7 151.8 121.3 108.2 Coal Offtake (mn tonnes) Eastern Coalfields Ltd. 7.4 10.3 11.4 10.5 6.9 Bharat Coking Coal Ltd. 7.9 8.0 9.0 9.2 8.6 Central Coalfields Ltd. 11.9 14.0 16.3 14.8 14.3 Northern Coalfields Ltd. 16.6 18.6 20.8 18.7 17.7 Western Coalfields Ltd. 9.2 10.4 11.1 10.8 9.8 South Eastern Coalfields Ltd. 28.1 32.0 33.1 32.9 31.8 Mahanadi Coalfields Ltd. 29.3 31.1 32.8 32.5 32.8 North Eastern Coalfields Ltd. 0.1 0.1 0.3 0.1 0.1 Total Coal Offtake 110.5 124.6 134.8 129.5 121.9 Q2 FY16 Operating Parameters: Major Cost Items as a % of Net Sales Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q-o-Q Change (bps) Y-o-Y Change (bps) Cost of Material Consumed 10.8% 10.4% 10.4% 8.4% 9.7% 133 bps (110) bps Employee Benefit Expenses 46.5% 42.2% 38.7% 37.9% 44.4% 650 bps (207) bps Power and Fuel 3.7% 3.4% 2.9% 3.1% 3.9% 75 bps 12 bps OBR Adjustment 3.5% 5.7% 7.6% 3.7% 0.2% (350) bps (329) bps Contractual Expenses 10.4% 12.8% 13.5% 13.1% 13.3% 16 bps 292 bps Other Expenses 4.0% 4.6% 4.5% 4.0% 5.2% 123 bps 119 bps Total Cost of Production 86.8% 80.4% 74.0% 76.9% 85.4% 851 bps (140) Bps 3
Q2 FY16 Operating Parameters (Contd): Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 FSA Sales Volume (mn tonnes) 96.1 114.7 116.9 109.0 103.0 Q-o-Q -3.1% 19.4% 1.9% -6.8% -5.5% Y-o-Y 4.7% 17.5% 7.1% 9.8% 7.2% E-auction Sales Volume (mn tonnes) 10.6 5.6 13.9 16.0 14.7 Q-o-Q -36.9% -47.2% 148.2% 15.1% -7.9% Y-o-Y -17.8% -62.9% -17.3% -4.8% 39.1% Washed Coal Sales Volume (mn tonnes) 2.8 3.0 3.2 3.4 3.1 Q-o-Q -6.7% 7.1% 6.7% 6.6% -7.9% Y-o-Y -12.5% -11.8% 6.7% 13.7% 12.1% Total Offtake Volume (mn tonnes) 110.5 124.6 134.8 129.5 121.9 Q-o-Q -7.6% 12.8% 8.2% -3.9% -5.8% Y-o-Y 1.2% 6.3% 3.8% 8.3% 10.4% FSA Sales Realization (Rs. per tonne) 1,260.0 1,298.0 1,419.0 1,318.0 1,294.0 Q-o-Q -4.5% 3.0% 9.3% -7.1% -1.8% Y-o-Y -0.2% 1.8% 0.8% -0.2% 2.7% E-auction Sales Realization (Rs. per tonne) 2,496.0 3,134.0 2,386.0 2,184.0 1,788.0 Q-o-Q 11.1% 25.6% -23.9% -8.5% -18.1% Y-o-Y 12.4% 40.4% 11.5% -2.8% -28.4% Washed Coal Realization (Rs. per tonne) 2,444.0 2,620.0 1,971.0 2,229.0 2,328.0 Q-o-Q 2.1% 7.2% -24.8% 13.1% 4.4% Y-o-Y 5.0% 7.8% -22.6% -6.9% -4.7% Blended Realization (Rs. per tonne) 1,419.2 1,425.9 1,541.5 1,464.1 1,391.0 Q-o-Q -4.7% 0.5% 8.1% -5.0% -5.0% Y-o-Y 0.5% -1.3% 0.0% -1.7% -2.0% 4
Financial Statements: Consolidated Profit and Loss Statement Projections (Rs. mn) FY15 FY16E FY17E FY18E FY19E FY20E Net Sales 720,146 766,792 933,217 1,052,163 1,266,416 1,531,877 Revenue Growth Rate (%) 4.7% 6.5% 21.7% 12.7% 20.4% 21.0% Total Expenditure (567,849) (612,356) (727,915) (817,200) (986,246) (1,194,687) EBITDA 152,297 154,436 205,302 234,964 280,171 337,190 EBITDA Growth Rate (%) -5.1% 1.4% 32.9% 14.4% 19.2% 20.4% EBITDA Margin (%) 21.1% 20.1% 22.0% 22.3% 22.1% 22.0% Depreciation (23,198) (23,461) (29,167) (36,488) (43,801) (52,356) EBIT 129,099 130,975 176,135 198,476 236,370 284,834 Interest (73) (127) (131) (130) (139) (154) Other Income 86,811 85,518 91,316 103,180 116,216 136,174 PBT 215,837 216,367 267,319 301,525 352,447 420,854 Income Tax Expenses (78,573) (75,592) (85,542) (93,473) (105,734) (126,256) PAT 137,264 140,775 181,777 208,053 246,713 294,598 PAT Growth Rate (%) -9.7% 2.6% 29.1% 14.5% 18.6% 19.4% PAT Margin (%) 3.7% 4.5% 7.4% 10.1% 9.4% 7.2% Consolidated Balance Sheet Projections (Rs. mn) FY15E FY16E FY17E FY18E FY19E FY20E Share Capital 63,164 63,164 63,164 63,164 63,164 63,164 Reserves and Surplus 340,367 410,766 501,654 605,680 729,037 876,336 Minority Interest 658 658 658 658 658 658 Long Term Borrowings 1,712 1,514 1,009 505 0 0 Other Long Term Liabilities 39,994 39,994 39,994 39,994 39,994 39,994 Long Term Provisions 374,987 374,591 455,893 514,000 618,666 748,348 Short Term Borrowings - Overdraft 2,001 0 0 0 0 0 Trade Payables 9,208 10,119 11,832 13,310 15,887 19,290 Other Current Liabilities 205,967 201,571 245,321 276,589 332,911 402,694 Short Term Provisions 67,051 66,631 81,092 91,428 110,046 133,113 Total Liabilities 1,105,109 1,169,008 1,400,617 1,605,328 1,910,362 2,283,598 Net Tangible Assets 153,460 168,053 195,137 237,426 284,822 334,131 Tangible CWIP 31,046 109,549 150,212 182,299 172,735 168,630 Net Intangible Assets 7,691 16,426 23,107 17,460 11,812 6,164 Intangible CWIP 20,548 10,274 0 0 0 0 Non Current Investments 9,631 6,002 4,867 5,680 10,094 16,193 Deferred Tax Assets (Net) 19,596 18,777 22,852 25,765 31,011 37,511 Long Term Loans and Advances 16,882 4,621 3,747 4,373 7,770 12,465 Other Non Current Assets 9,530 9,530 9,530 9,530 9,530 9,530 Current Investments 18,504 4,230 3,430 4,003 7,114 11,413 Inventories 61,838 71,078 85,577 93,065 110,154 134,452 Trade Receivables 85,219 76,554 101,137 121,097 150,881 173,752 Cash and Cash Balance 530,925 574,562 699,265 788,392 948,933 1,147,844 Short Term Loans and Advances 88,268 47,179 38,258 44,648 79,338 127,280 Other Current Assets 52,277 52,173 63,497 71,590 86,169 104,231 Total Assets 1,105,415 1,169,008 1,400,617 1,605,328 1,910,362 2,283,598 5
Financial Statement (Contd ) Consolidated Cash Flow Statement Projections (Rs. mn) FY15E FY16E FY17E FY18E FY19E FY20E Profit Before Tax 215,837 216,367 267,319 301,525 352,447 420,854 Depreciation and Amortization 23,198 23,461 29,167 36,488 43,801 52,356 Other Adjustments (5,986) (49,135) (47,085) (53,329) (56,232) (63,631) Change in Working Capital 0 (3,951) 86,744 62,736 115,485 154,205 Income Tax Paid (95,721) (75,592) (85,542) (93,473) (105,734) (126,256) Cash Flow from Operating Activities 137,328 111,150 250,603 253,947 349,766 437,527 CAPEX (49,014) (115,019) (93,322) (105,216) (75,985) (91,913) Change in Investments 9,615 17,902 1,935 (1,386) (7,524) (10,398) Others 48,342 102,613 57,011 46,444 18,284 11,147 Cash Flow from Investing Activities 8,943 5,495 (34,376) (60,159) (65,225) (91,164) Repayment of Borrowings (63) (2,506) (505) (505) (505) 0 Interest Expenses (73) (127) (131) (130) (139) (154) Dividend & Dividend Tax (155,963) (70,377) (90,889) (104,026) (123,356) (147,299) Cash Flow from Financing Activities (156,099) (73,009) (91,524) (104,661) (124,000) (147,453) Net Cash Inflow / Outflow (9,827) 43,636 124,703 89,127 160,541 198,911 Opening Cash & Cash Equivalents 523,895 530,925 574,562 699,265 788,392 948,933 Closing Cash & Cash Equivalent 514,068 574,562 699,265 788,392 948,933 1,147,844 Consolidated Financial Ratios Particulars FY15E FY16E FY17E FY18E FY19E FY20E Profitability & Return Ratios EBITDA Margin (%) 21.1% 20.1% 22.0% 22.3% 22.1% 22.0% PAT Margin (%) 19.1% 18.4% 19.5% 19.8% 19.5% 19.2% RONW (%) 33.1% 32.0% 35.0% 33.7% 33.7% 34.0% Working Capital & Liquidity Ratios Payables (Days) 4.7 4.8 4.6 4.6 4.6 4.6 Inventory (Days) 31.3 33.8 33.5 32.3 31.7 32.0 Receivables (Days) 43.2 36.4 39.6 42.0 43.5 41.4 Current Ratio (X) 2.9 3.0 2.9 2.9 3.0 3.0 Quick Ratio (X) 2.7 2.7 2.7 2.7 2.8 2.8 Turnover & Leverage Ratios Fixed Asset Turnover (X) 4.5 4.2 4.3 4.1 4.3 4.5 Total Asset Turnover (X) 0.7 0.7 0.7 0.7 0.7 0.7 Debt Equity Ratio (X) 0.0 0.0 0.0 0.0 0.0 0.0 Dividend Pay Out Ratio 113.7% 50.0% 50.0% 50.0% 50.0% 50.0% Valuation Ratios DPS (Rs.) 24.7 11.1 14.4 16.5 19.5 23.3 BVPS (Rs.) 64.0 75.2 89.6 106.1 125.6 148.9 EPS (Rs. Cr) 21.7 22.3 28.8 33.0 39.1 46.7 P / E (X) 15.2 14.8 11.5 10.0 8.5 7.1 P / BVPS (X) 5.2 4.4 3.7 3.1 2.6 2.2 EBITDA/Tonne 311.2 287.1 356.7 369.3 373.2 378.8 EV/Tonne 3,196.0 2,822.3 2,420.3 2,048.7 1,521.6 1,059.7 EV / Sales (X) 21.7 19.8 14.9 12.4 9.0 6.2 EV / EBITDA (X) 8.2 8.2 5.8 4.8 3.5 2.4 6
Choice s Rating Rationale The price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral. Date Coal India Ltd. Recommendation CMP (Rs.) Target Price (Rs.) 17-Sept-2015 331 388 13-Aug-2015 377 426 02-May-2015 384 426 Rating Legend Rating Upside Absolute Return >15% Accumulate Absolute Return Between 10-15% Hold Absolute Return Between 0-10% Reduce Absolute Return 0 To Negative 10% Sell Absolute Return > Negative 10% Institutional Equity Team Name Designation Email id Contact No. Ajay Kejriwal President ajay@choiceindia.com 022-6707 9850 Sumeet Bagadia Head of Research sumeet.bagadia@choiceindia.com 022-6707 9830 Amit Singh VP - Institutional Sales amit.singh@choiceindia.com 022-6707 9852 Devendra Gaikwad Sr. Manager - Institutional Sales devendra.gaikwad@choiceindia.com 022-6707 9877 Rajnath Yadav Research Analyst rajnath.yadav@choiceindia.com 022-6707 9975 Satish Kumar Research Analyst satish.kumar@choiceindia.com 022-6707 9974 Kunal Parmar Research Associate kunal.parmar@choiceindia.com es 022-6707 9982 Amit Pathania Research Associate amit.pathania@choiceindia.com 022-6707 9979 Vikas Chaudhari Research Associate vikas.chaudhari@choiceindia.com 022-6707 9988 Trirashmi Ghoderao Research Advisor trirashmi.ghoderao@choiceindia.com 022-6707 9972 Neeraj Yadav Research Advisor Neeraj.yadav@choiceindia.com 022-6707 9988 Disclaimer This is solely for information of clients of Choice Broking and does not construe to be an investment advice. It is also not intended as an offer or solicitation for the purchase and sale of any financial instruments. Any action taken by you on the basis of the information contained herein is your responsibility alone and Choice Broking its subsidiaries or its employees or associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained in this recommendation, but Choice Broking or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this recommendation or any action taken on basis of this information. This report is based on the fundamental analysis with a view to forecast future price. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Choice Broking has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Choice Broking makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. The information and any disclosures provided herein are in summary form and have been prepared for informational purposes. The recommendations and suggested price levels are intended purely for stock market investment purposes. The recommendations are valid for the day of the report and will remain valid till the target period. The information and any disclosures provided herein may be considered confidential. Any use, distribution, modification, copying, forwarding or disclosure by any person is strictly prohibited. The information and any disclosures provided herein do not constitute a solicitation or offer to purchase or sell any security or other financial product or instrument. The current performance may be unaudited. Past performance does not guarantee future returns. There can be no assurance that investments will achieve any targeted rates of return, and there is no guarantee against the loss of your entire investment. POTENTIAL CONFLICT OF INTEREST DISCLOSURE (as on date of report) Disclosure of interest statement Analyst interest of the stock /Instrument(s): - No. Firm interest of the stock / Instrument (s): - No. +91-022-6707 9999 +91-022-6707 9959 www.choiceindia.com Choice Equity Broking Pvt. Ltd. Choice House, Shree Shakambhari Corporate Park, Plt No: -156-158, J.B. Nagar, Andheri (East), Mumbai - 400 099. 7