We revise our rating on Coal India to Add (Buy previously) as the recent stock rally prices in a normalised growth trajectory, though accelerated volume growth through a combination of policy efforts and on the ground traction could help raise the earnings profile. At 4% dividend yield and 9x (times) P/E (price-to-earnings) CIL is not outside our comfort zone, though will look for step-up in revenue growth as a catalyst for stock performance. Revise target price to R392 (R335 previously).
Earnings handicapped by strike: Absence of revenue growth due to lack of incremental volumes as well as flat realisations led to 17% year-on-year decline in Ebitda for CIL, which reported revenues of R200 bn (0% y-o-y, 18% q-o-q), Ebitda of R51 bn (-17% y-o-y, 24% q-o-q) and net income of R44 bn (-18% y-o-y, 13% q-o-q). Ebitda was impacted by R9 bn of provisions. Employee cost was maintained at R70 bn for the quarter (6% y-o-y decline), while sustenance of realisations suggests that incentives for supplying annual contracted quantities have been sustained.
Policy action to step up volumes: The paucity of supplies for the power sector will likely make ramp-up of domestic volumes a priority area for the new government. CIL?s volume trajectory has been tepid over the past five years (3% CAGR) with the exception of FY13 that witnessed a 7% growth in volumes. In our view, increased focus on (i) setting up three critical rail routes with a potential capacity of 100-300 mtpa and (ii) fast-tracking of environment and forest clearances could aid a step-up improvement in dispatch volumes of Coal India. We note that 241 coal mining projects are awaiting clearances?48 environmental clearance proposals with a capacity of about 109m tons and 193 forestry proposals at central or state machinery.
Highlights of Q4FY14 results
n Volumes?CIL reported sequential growth in volumes in Q4FY14 of 130mt (0% y-o-y, 11% q-o-q) and production of 143 m tonnes. Volume growth was impacted by employee strike in March.
n Realisation?CIL?s blended realisation remained flat at R1,464/tonne in Q4 due to (i) better sales mix?e-auction sales continued to improve to 13% of total sales (11% in Q4FY13) and (ii) a sequential improvement in raw coal realisations (+4% q-o-q). We estimate that incentives for FY14 were about R9bn, similar to the quantum earned during the same period last year.
n Employee cost?was nearly flat sequentially at R72 bn (-3% y-o-y, 1% q-o-q). We note that employee cost remains fairlyresilient for CIL, likely owing to continued employee attrition. For full year FY14, employee cost rose only 2% y-o-y to R277 bn.
n OBR adjustment?OBR (overburden removal) adjustment increased sharply to R15 bn (70% y-o-y, 112% q-o-q) in Q4 reflecting either (i) lower cash costs leading to a increase in provisioning requirement and/or (ii) an increase in actual strip ratio.
?Kotak Institutional Equities