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Coal India Ltd.-Q2FY14 Result Update - "BUY"




Kisan Ratilal Choksey Shares and Securities Private Limited


19 Nov 2013





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Coal India Ltd.-Q2FY14 Result Update CMP: Rs 271 Target Price: Rs 318 Recommendation: BUY “Higher operating expenses coupled with lower realization dented bottom-line” Coal India Ltd. (CIL) reported 5.8% Y-o-Y increase in top-line on account of higher offtake, which increased by 7.3% Y-o-Y. Higher operating expenditure led to 2.4% and 1.2% Y-o-Y decline in EBITDA and bottom-line. Q2FY14 result: Lower blended realization and higher operating cost led to poor performance. • CIL reported 5.8% Y-o-Y increase in top-line to Rs. 15,411Cr as against our expectation of 9.9% Y-o-Y growth. Lower than expected top-line growth was due to lower blended realization. Sales realization from FSA and e-auction declined by 1.9% and 9.8% Y-o-Y respectively. Lower FSA sales realization was due to supply of lower grade coal on account of monsoon and liquidation of year old stock. Lower e-auction sales realization was due to poor demand from key manufacturing sectors like cement, sponge iron etc. However on sequential basis, e-auction sales realization increased by 3.8% Y-o-Y, showing signs of recovery in pricing. Coal production and offtake increased by 9.6% and 7.3% Y-o-Y. During the quarter, the company liquidated around 12mn tonnes of pit head inventory. • EBITDA declined by 5.8% Y-o-Y to Rs. 2,794Cr due to higher operating expenditure. Total operating expenditure as percentage of net sales, increased by 151bps to 81.9.0% from 80.4% in Q2FY13, due to higher contractual and other expenses. Consequently, EBITDA margin declined to 18.1% from 19.6% in same quarter last year. Adjusted net profit declined by 1.2% Y-o-Y to Rs. 3,061Cr with PAT margin of 19.8% Expected improvement in coal sales realization in H2FY14: We expect an improvement in blended coal realization on account of increase in transportation charge by CIL to its customers. The hike is basically due to higher diesel and wage cost. Moreover, realization improvement is also expected due to offtake of fresh coal rather than pit head coal. E-auction sales realization has shown the sign of recovery on sequential basis, by increasing 3.8%. Post monsoon, demand for e-auction coal from key manufacturing sectors like cement, sponge iron etc are expected to improve, thus leading to easing off pricing pressure. H2FY14 crucial for meeting annual target: For FY14, the company has set annual production & offtake target at 492mn & 500mn tonnes respectively, representing a growth of 6.0% & 6.4% respectively over FY13. During first seven months of FY14, the company has missed the production & offtake target by 5.1% & 3.4% respectively. To meet the annual offtake target, the asking growth rate would be around 9-10% respectively as compared to H1FY14 offtake growth rate of 4.7%. Valuation & Outlook: We lower our FY14 and FY15 earning by 5.6% and 0.6% on account of lower blended coal realization and higher operating cost. Currently the stock is trading at attractive valuation of TTM EV/EBITDA multiple of 6.4. We recommend “BUY” rating on the stock due to future earning visibility, higher dividend and discounted coal price as compared to global coal prices.

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