Buy Coal India;target of Rs 400: Prabhudas Lilladher

Prabhudas Lilladher's research report on Coal IndiaCoal India (COAL) reported Q3FY16 earnings above our expectation on the back of lower than expected costs. Company’s E‐auction volumes and realisations improved 2.8%/4.3% QoQ against our expectation of ↓5%/↑0.7%. Concerns of lower realisations in E‐auction would be allayed by offering higher quantities with higher grade. Street is overly apprehensive on COAL’s ability to pass on the impact of escalation in cost associated with hike in wages of non‐executive employees. While, we believe that 6% price hike in power segment and higher scale (+10% increase in volumes) would well off‐set the impact. Driven by attractive valuations (EV/EBITDA:6x FY17E), strong outlook on volumes and rich dividend yield, we maintain BUY rating with TP of Rs400, EV/EBITDA of 8x FY17E. Thanks to strong scale benefit, lower employee costs and lower OBR cost, total cost/t fell 6.5% YoY at Rs1072, below our expectation of Rs1118. Adjusted for OBR and provisions, cash cost fell 4.6% YoY at Rs989 (PLe:Rs1042). Driven by lower costs, EBITDA came ahead of our expectation at Rs48.2bn (PLe:Rs45.4bn), up 19.7% YoY. Lower than expected other income restricted growth in PAT at 12.9% YoY to Rs37.0bn (PLe: Rs35.7bn). Other income fell 17.2% YoY at Rs13.5bn (PLe:Rs15bn), primarily due to lower yields on treasury investments.

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