COAL INDIA Stable play

(1)

We

met

senior

management

of

Coal

India

(CIL)

to

know

more

about

the

steps

the

company

is

taking

to

tackle

the

impending

wage

hike

and

meet

its

sales

target,

among

other

things.

CIL

is

confident

of

mitigating

effects

of

the

impending

wage

hike

and

increase

in

clean

energy

cess.

Further,

it

has

maintained

its

production

target

of

598mn

tonnes

for

FY17.

CIL

is

targeting

to

reduce

costs

by

5%

every

year

primarily

through

manpower

cost

rationalisation

and

enhancing

operating

and

supply

chain

efficiencies.

Our

assumptions

remain

unchanged.

We

maintain

‘BUY’

with

TP

of

INR376

(16x

FY18E

PE).

Pass through of wage escalation through price hike

Management mentioned CIL would be able to pass on the wage escalation through an increase in prices. We believe there is sufficient headroom for the company to hike prices as its FSA price is still at ~35% discount on average to import parity prices.

Comfortably placed on volume front

We believe CIL will be able to expand its production volume by ~9% in FY17E to 598mn tonnes. Almost 80% of CIL’s sales volumes are locked through long‐term contracts (5 years and more). This brings stability to volumes. Going ahead, FSA volumes are likely to expand and e‐auction volumes are likely to remain at 10‐11%.

Targeting cost reduction of 5% per annum

Management stated CIL has embarked on slew of measures to reduce costs. The company intends to progressively reduce manpower costs by INR10‐11bn every year. It is also working on multiple projects to achieve supply chain efficiencies. The target is to reduce overall costs by 5% per annum.

Outlook and valuations: Positive; maintain ‘BUY’

We believe that the company would be able to maintain its margins in FY17E led by pass through of wage hikes and volume growth. We keep our assumptions unchanged for FY17E and FY18E. The stock is trading at 12.0x and 12.5x FY17E and FY18E EPS, respectively. Maintain 'BUY/SO' with target price of INR376.

COAL

INDIA

Stable

play

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Outperform

Risk Rating Relative to Sector Medium

Sector Relative to Market Underweight

MARKET DATA (R: COAL.BO, B: COAL IN)

CMP : INR 294

Target Price : INR 376

52‐week range (INR) : 447 / 287

Share in issue (mn) : 6,316.4

M cap (INR bn/USD mn) : 1,860 / 27,869

Avg. Daily Vol.BSE/NSE(‘000) : 4,348.9

SHARE HOLDING PATTERN (%)

Current Q2FY16 Q1FY16

Promoters * 79.6 80 79.6

MF's, FI's & BK’s 8.6 8.4 8.6

FII's 8.8 9.0 9.2

Others 2.9 2.9 2.6

* Promoters pledged shares (% of share in issue) : NIL PRICE PERFORMANCE (%) Stock Nifty EW Metals and Mining Index 1 month (6.3) 5.7 8.3 3 months (5.9) (2.0) 3.5 12 months (18.3) (12.5) (23.5) Amit A Dixit +91 22 6620 3160 [email protected]

India Equity Research| Metals and Mining

March 22, 2016

Financials (INR mn)

Year to March FY15 FY16E FY17E FY18E

Net revenue 741,194 794,937 915,863 1,028,570

EBITDA 173,347 189,839 207,836 209,664

Adjusted Profit 137,191 148,800 155,587 148,597

Diluted equity shares (mn) 6,316 6,316 6,316 6,316

Adjusted diluted EPS (INR) 21.7 23.6 24.6 23.5

EPS Growth (%) (9.2) 8.5 4.6 (4.5)

Diluted P/E (x) 13.6 12.5 12.0 12.5

(2)

Metals

and

Mining

Wage escalation to be mitigated through increase in prices

Contractually, management believes they would be able to pass on effects of wage hike through a commensurate increase in price. Existing FSA framework allows CIL to notify the base price from time to time.

In Q3FY16, average realisation for FSA coal was INR1,277/t. Though price of higher grade coal is almost at parity with the international prices, lower grade coal is at ~40% discount to import parity prices. Of the total sales volume through FSAs, ~14% is of higher grade coal. Therefore, weighted average discount to import parity prices is ~35%. We believe this provides sufficient headroom for CIL to escalate prices. Management also expects to pass on the increased clean energy cess levied in the current Budget.

Management expects e‐auction prices to be between INR1,900‐2,000/t in Q4FY16 and thereon. E‐auction volumes also include 10mn tonnes for tapering linkages for which pricing is at FSA price + 10% as compared to the benchmark of FSA price + 70%.

Comfortably placed on volume front

Currently, almost 80% of CIL’s sales volumes are locked through long‐term contracts of 5 years and more. We believe this will bring stability to volumes.

Table 1: Expected volume split in FY16E

Source: Company

Going forward, management has mentioned it would expand volume in fuel supply agreement (FSA), while maintaining e‐auction volumes at 10‐11% of total sales.

Earlier this month, CIL regulated production at some of its mines due to low off‐take from power plants. However, normalcy has now been restored and management expects to close the year with 534mn tonnes sales volume. YTD March 13, the company has reported sales volume of 504.1mn tonnes, up 9.4% YoY. On production front, it reported 9.1% YoY increase to 501.3mn tonnes. For FY17, CIL’s guidance remains unchanged at 598mn tonnes. Inventory level stands at 45‐50mn tonnes.

Management mentioned imports have fallen to the extent of increase in supply from CIL. Management also mentioned that some volume of imports is inevitable as coking coal up to 60mn tonnes would continue to be imported. Also, consumers along western coast find imported prices cheaper for higher grade in the current scenario. Progressively, management expects coal imports to decline with substitution from CIL.

Segment Million tonnes Term of Agreement

FSA pre 31 March 2009 306 5 years

FSA post 31 March 2009 120 20 years

e‐auctions 50 Spot

(3)

Shipments under FSA are within tolerance limits of average contracted quantity

(ACQ)

There is a reciprocal penalty clause for quantity shortfall below 90% and 80% of ACQ for FSAs executed before and after March 31, 2009, respectively. However, penalty has not been invoked as shipments continue to remain within the quantity shortfall limits. In limited number of cases where off‐take has fallen below ACQ, there have been force majeure factors such as delay in start up of power plant. The company closely monitors off‐take numbers and adjusts ACQ depending on the operating rate of power plants.

Reduction of 5% in operating costs targeted every year

Management mentioned it is focusing on cost reduction. In Q3FY16, CIL recorded lowest cost per tonne in past 2 years. The target is to reduce costs by 5% every year. Management expects to reduce manpower cost by INR11‐12bn every year. For FY17E, manpower cost is expected at INR346bn (factoring in wage hikes). CIL has found reverse auction of consumables and services to further reduce cost. For instance, reverse auction of explosives is expected to lower costs by INR8bn per annum. There are other measures such as improvement of machine utilisation, reduction in power cost, improvement in supply chain, etc., being undertaken that would further reduce costs.

Buyback and OFS remain in limbo

On potential buyback of stake, management mentioned there are valuation issues associated with the subsidiaries, which are unlisted. Further, subsidiaries with large share capital base such as Bharat Coking Coal (BCCL) and Eastern Coalfield (ECL) are not profitable, while the profitable ones such as, Mahanadi Coalfield (MCL), have low share capital. Management stated while the government alludes to OFS in its FY17 divestment target, they have limited say in such matters.

(4)

Metals

and

Mining

Company Description

Coal India (CIL) is the world’s largest coal reserve holder and producer and also controls ~80% of the Indian coal market. It is going to be the primary beneficiary of the structural deficit of coal in India. Moreover, it is one of the least cost producers of coal in the world.

CIL, a Maharatna company, is one of the largest public sector companies in India in terms of turnover. Its product portfolio consists largely of thermal coal with the balance being coking coal. The company enjoys a near‐monopoly position in the lucrative coal market and is more of a utility player due to assured volume off‐take, pseudo regulated pricing and minimal chance of a product price cut, as prices already remain at ~40% discount to current depressed international benchmark prices.

It currently operates ~471 mines in India and is also scouting for international mines to increase global presence and assure its resources. It sells ~10% of its production based on the e‐Auction route and ~3.5% beneficiated coal (2x realisations of raw coal).

Investment Theme

The government focus on ramping up domestic production (to counter rising imports) will lead to sustainable volume growth for CIL over the next five years. Low fuel costs and an expected realisations increase in FY17 will drive margin improvement over FY15‐17.

Key Risks

Lower than expected new FSA demand Loss of volume‐linked incentive Lower than expected volume growth

Sharp drop in international and eAuction prices

(5)

Financial

Statements

Income statement (INR mn)

Net revenue 741,194 794,937 915,863 1,028,570

Accretion to stock (5,305) (2,500) ‐ ‐

Purchase of goods 103,398 116,479 134,534 158,918

Employee costs 298,741 301,131 346,542 382,582

Total SG&A expenses 147,540 167,351 199,808 244,082

Power and Freight 23,473 22,637 27,143 33,324

Total operating expenses 567,847 605,099 708,026 818,907

EBITDA 173,347 189,839 207,836 209,664

Depreciation 23,198 21,570 26,773 31,429

EBIT 150,149 168,269 181,063 178,234

Add: Other income 65,706 57,203 54,693 46,931

Less: Interest Expense 73 18 18 18

Add: Exceptional items (51) ‐ ‐ ‐

Profit Before Tax 215,732 225,454 235,738 225,147

Less: Provision for Tax 78,573 76,654 80,151 76,550

Reported Profit 137,159 148,800 155,587 148,597

Exceptional Items (32) ‐ ‐ ‐

Adjusted Profit 137,191 148,800 155,587 148,597

Shares o /s (mn) 6,316 6,316 6,316 6,316

Adjusted Basic EPS 21.7 23.6 24.6 23.5

Diluted shares o/s (mn) 6,316 6,316 6,316 6,316

Adjusted Diluted EPS 21.7 23.6 24.6 23.5

Adjusted Cash EPS 25.4 27.0 28.9 28.5

Dividend per share (DPS) 20.7 20.0 20.0 20.0

Dividend Payout Ratio(%) 113.2 100.8 96.4 100.9

Common size metrics

Operating expenses 76.6 76.1 77.3 79.6

EBITDA margins 23.4 23.9 22.7 20.4

Net Profit margins 18.5 18.7 17.0 14.4

Growth ratios (%)

Revenues 4.7 7.3 15.2 12.3 EBITDA (3.4) 9.5 9.5 0.9 PBT (5.7) 4.5 4.6 (4.5) Adjusted Profit (9.2) 8.5 4.6 (4.5) EPS (9.2) 8.5 4.6 (4.5) Key Assumptions

Macro

GDP(Y‐o‐Y %) 7.2 7.4 7.9 8.3

Inflation (Avg) 5.9 4.8 5.0 5.2

Repo rate (exit rate) 7.5 6.8 6.0 6.0

USD/INR (Avg) 61.1 65.0 67.5 67.0

Sector

Indonesian coal (USD/t) 39.0 40.0 40.0 40.0

India coal demand (mt) 787.6 850.6 905.9 964.8

Coal imports (mn tonnes) 194.7 201.7 208.3 176.4

Company

Production (mt) 494 544 598 658

Sales volumes (MT) 490 539 593 667

E‐auction volume (mt) 47 62 66 72

Beneficiation volume(mt) 12 14 17 21

Raw Coal volume (mt) 426 456 503 566

E‐auction (INR/t) 2,450 1,939 1,939 1,939

Beneficiation (INR/t) 2,348 2,324 2,464 2,464

Raw coal (INR/t) 1,311 1,307 1,384 1,382

Cost of materials(INR/t) 148 156 163 171

Power and fuel (INR) 48 42 46 50

Welfare expenses (INR/t) 6 9 9 10

Repairs per tonne (INR) 23 25 26 28

Contractual exp(INR/t) 174 191 216 244

Misc expenses (INR/t) 63 61 64 67

OBR (INR/t) 78 65 65 65

Provisions (INR/t) 20 20 20 20

Staff costs (INR mn) 299 301 347 383

Blended EBITDA/t (USD/t) 354 352 351 314

Depreciation rate (%) 5.9 4.8 5.0 5.0

Debtor days 41 39 35 37

Inventory days 219 198 174 171

(6)

Metals

and

Mining

Peer comparison valuation

Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)

Name (USD mn) FY16E FY17E FY16E FY17E FY16E FY17E

Coal India 27,869 12.5 12.0 7.0 6.6 36.9 38.3

China Coal Energy Co Ltd 9,130 ‐ ‐ 21.5 22.4 (2.9) (3.1)

Peabody Energy Corp 47 ‐ ‐ 12.3 17.4 (60.2) (76.4)

Median ‐ ‐ ‐ 12.3 17.4 (2.9) (3.1)

AVERAGE ‐ 4.2 4.0 13.6 15.5 (8.8) (13.7)

Source: Edelweiss research

Cash flow metrics

Operating cash flow 94,723 136,826 145,118 90,978

Investing cash flow 19,113 (22,493) (33,653) (50,249)

Financing cash flow (109,715) (150,017) (150,017) (150,017)

Net cash Flow 4,121 (35,683) (38,551) (109,288)

Capex (58,374) (63,757) (88,345) (97,180)

Dividend paid (155,248) (149,998) (149,998) (149,998)

Profitability and efficiency ratios

ROAE (%) 33.1 36.9 38.3 36.4

ROACE (%) 51.7 55.3 57.5 54.7

Inventory Days 219 198 174 171

Debtors Days 41 39 35 37

Payable Days 32 31 31 33

Cash Conversion Cycle 228 206 177 175

Current Ratio 3.0 2.7 2.4 2.2 Gross Debt/EBITDA 2.3 2.1 1.9 1.9 Gross Debt/Equity 1.0 1.0 1.0 1.0 Adjusted Debt/Equity 1.0 1.0 1.0 1.0 Net Debt/Equity (134.9) (133.0) (121.8) (95.4) Operating ratios

Total Asset Turnover 0.9 1.0 1.1 1.3

Fixed Asset Turnover 4.3 3.8 3.4 3.1

Equity Turnover 1.8 2.0 2.3 2.5

Valuation parameters

Adj. Diluted EPS (INR) 21.7 23.6 24.6 23.5

Y‐o‐Y growth (%) (9.2) 8.5 4.6 (4.5)

Adjusted Cash EPS (INR) 25.4 27.0 28.9 28.5

Diluted P/E (x) 13.6 12.5 12.0 12.5

P/B (x) 4.6 4.6 4.6 4.6

EV / Sales (x) 1.8 1.7 1.5 1.5

EV / EBITDA (x) 7.6 7.0 6.6 7.0

Dividend Yield (%) 7.0 6.8 6.8 6.8

Balance sheet (INR mn)

As on 31st March FY15 FY16E FY17E FY18E

Share capital 63,164 63,164 63,164 63,164

Reserves & Surplus 340,367 339,168 344,757 343,355

Shareholders' funds 403,531 402,332 407,920 406,519

Minority Interest 658 658 658 658

Short term borrowings 2,001 2,001 2,001 2,001

Long term borrowings 2,018 2,018 2,018 2,018

Total Borrowings 4,019 4,019 4,019 4,019

Long Term Liabilities 414,981 414,981 414,981 414,981

Def. Tax Liability (net) (19,596) (19,596) (19,596) (19,596)

Sources of funds 803,593 802,394 807,983 806,581

Gross Block 409,520 489,216 577,561 674,741

Net Block 153,460 211,586 273,159 338,909

Capital work in progress 31,046 31,046 31,046 31,046

Intangible Assets 28,239 28,239 28,239 28,239

Total Fixed Assets 212,744 270,871 332,443 398,194

Cash and Equivalents 549,429 540,158 501,607 392,319

Inventories 61,838 61,544 66,426 82,522

Sundry Debtors 85,219 84,658 88,478 117,923

Loans & Advances 88,268 88,268 88,268 88,268

Other Current Assets 52,277 52,277 52,277 52,277

Current Assets (ex cash) 287,602 286,747 295,449 340,991

Trade payable 9,208 10,153 12,699 16,105

Other Current Liab 273,018 294,859 318,448 318,448

Total Current Liab 282,225 305,012 331,147 334,553

Net Curr Assets‐ex cash 5,377 (18,265) (35,698) 6,438

Uses of funds 803,593 802,394 807,983 806,581

BVPS (INR) 63.9 63.7 64.6 64.4

Free cash flow (INR mn)

Reported Profit 137,159 148,800 155,587 148,597

Add: Depreciation 23,198 21,570 26,773 31,429

Interest (Net of Tax) 47 12 12 12

Others (68,452) (57,197) (54,686) (46,925)

Less: Changes in WC (2,771) (23,642) (17,433) 42,136

Operating cash flow 94,723 136,826 145,118 90,978

Less: Capex 58,374 63,757 88,345 97,180

(7)

Insider Trades

Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

Bulk Deals

Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Holding – Top10

Perc. Holding Perc. Holding

Government of india 79.65 Life insurance corp 5.86

Capital group compan 1.24 Blackrock 0.61

Vanguard group 0.6 Prudential icici ass 0.44

Prudential 0.35 Fidelity management 0.26

Benchmark asset mana 0.23 Sbi funds management 0.22

*in last one year

Additional

Data

Directors Data

Shri S Bhattacharya Chairman‐cum‐Managing‐Director Shri Chandan Kumar Dey Director Finance

Shri N Kumar Technical Director Shri R Mohan Das Personnel & Industrial Relation Director

Shri B.K. Saxena Marketing Director Dr. A. K. Dubey Government Nominee Director

Smt. Sujata Prasad Government Nominee Director

Auditors ‐ De Chakraborty & Sen

(8)

Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk

Coal India BUY SO M Hindalco Industries HOLD SP M

Hindustan Zinc BUY SO L Jindal Steel & Power HOLD SP M

JSW Steel REDUCE SP H NMDC HOLD SP M

Steel Authority of India REDUCE SU M Tata Steel HOLD SP M

Vedanta HOLD SP M

RATING

&

INTERPRETATION

ABSOLUTE

RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE

RETURNS

RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE

RISK

RATING

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR

RATING

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

(9)

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91‐22) 4009 4400, Email: [email protected]

Nirav Sheth Head Research

[email protected]

Coverage group(s) of stocks by primary analyst(s): Metals and Mining

Coal India, Hindalco Industries, Hindustan Zinc, Jindal Steel & Power, JSW Steel, NMDC, Steel Authority of India, Tata Steel, Vedanta

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe

Rating Distribution* 89 56 29 173

* 3 stocks under review

Market Cap (INR) 67 49 57

Date Company Title Price (INR) Recos

Recent Research

15‐Mar‐16 Metals & Mining

Uptick in Iron ore prices

transient;

Sector Update 08‐Mar‐16 Metals &

Mining

Protectionism rush: Advantage

India;

Sector Update 18‐Feb‐16 Jindal Steel

and Power

Sector pain persists;

Result Update

57 Hold

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12‐month period

Hold appreciate up to 15% over a 12‐month period

Reduce depreciate more than 5% over a 12‐month period

Rating Expected to

One year price chart

250 290 330 370 410 450 Ma r ‐ 15 Ap r ‐ 15 Ma y ‐ 15 Ju n ‐ 15 Ju l ‐ 15 Au g ‐ 15 Se p ‐ 15 Oc t ‐ 15 No v ‐ 15 De c ‐ 15 Ja n ‐ 16 Fe b ‐ 16 Ma r ‐ 16 (I N R ) Coal India

(10)

Metals

and

Mining

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Mining

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