Buy Coal India; target Rs 424: SPA Research

SPA Research is bullish on Coal India and has recommended buy rating on the stock with a target price of Rs 424 in its November 30, 2012 research report.

"Coal India reported net sales of INR 145.7 bn, up by 10.8% YoY led by volume growth of 8.8% and improved average realization by 1.9%. EBITDA/tn declined sequentially by INR 145 to INR 282 in Q2FY13 (INR 267 in Q2FY12) largely on the back of INR 100/tn surge in employee cost. We retain our "BUY" recommendation on the stock with a target of INR 424.

Better performance amid monsoon season: Second quarter being a south west monsoon season, is typically a weak quarter for the company. CIL reported net sales of INR 145.7 bn, up by 10.8% YoY & down by 11.7% QoQ. This was led by volumes offtake of 101.4 mn tons in Q2FY13, up by 8.8% YoY & down by 9.9% QoQ and marginal improvement in average realizations to INR 1437/tn, up by 1.9% YoY & lower by 2% QoQ. Volumes were also helped by liquidation of 12.3 mn tons of inventory in Q2FY13.

Mixed Operational Performance: CIL volume mix which is largely skewed towards FSA contributed 84.5% of total volumes in Q2FY13 (84.4% in Q1FY13). Realization in case of FSA stood at INR 1287/tn, improving by 5% YoY & 1.6% QoQ. E-auctions volumes stood at 11.5% of the total mix (12% in Q1FY13) with realization/tn at INR 2282, down by 6.3% YoY and 10.9% QoQ. This decline was driven by grade mix issues and weak international coal prices. Volume contribution from beneficiated/washed coal was at 3.2% of total volumes (2.9% in Q1FY13) with realization/tn at INR 2086, down by 7.8% YoY & 9.9% on QoQ basis. Share of coal dispatched to the power sector has inched up by 14.8% YoY to ~156 mn tons in H1FY13, whereas it has remained flat for other sectors.

Contraction in EBITDA margin: EBITDA margin contracted by 954 bps QoQ to 19.64% led by higher employee expenses at 45% of net sales, up by 770 bps QoQ due to an increase in bonus of INR 2.3 bn. EBITDA/tn stood at INR 282 in Q2FY13 vis-à-vis INR 267 in Q2FY12 & INR 427 in the sequential quarter, led by higher employee expenses (INR 645/tn in Q2FY13 vis-à-vis INR 545/tn in Q1FY13) and lower average realization (INR 1437/tn vis-à-vis INR 1466/tn in Q1FY13). PAT margin stood at 21.1%, up by 1.4% YoY & down by 6% QoQ aided by a sharp decline in depreciation and amortization expense (down by 27.7% QoQ).

Review of FSA clauses: CIL will meet 80% requirement with 15% imported coal & 65% domestic coal. However, there is no clarity on price pooling arrangement of the imported coal with domestic coal. We do not see any negative impact on CIL because of this as it would be a pass-through as a pre-condition sought by CIL for imports.

Outlook & Valuation: CIL's production in H1FY13 stood at 191.54 mn tn, up by 8.45% YoY, while off-take at 214.78 mn tn was up by 7.4% YoY. Transportation infrastructure has been improving for the company, as rake availability was 170 rakes a day in H1FY13, up by 10.4% YoY. The share of railways in the transportation mix has gone up to 50.1% as compared to 48.4% in H1FY12. On the back of increased coal production, higher FSA realisations, intact e-auction volumes, increased availability of rakes and FSA issue about to resolve, we expect CIL's revenue & net profit to register a CAGR of 8% & 14% respectively over FY12-FY14E. We retain our "BUY" recommendation on the stock with a target of INR 424 based on FCFE valuation approach," says SPA Research report.

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