Coal India: A decent quarter with a 13.8% y-o-y growth in revenues
- Revenues up y-o-y on higher realizations and higher volumes: In Q1FY13, CIL reported revenues of Rs16,500.6 cr, up 13.8% y-o-y and down 15% q-o-q. CIL’s average realizations have gone up 7% y-o-y to Rs1,459.7 per tonne driven mostly by improved notified prices of coal at Rs1,267/ton (up 6.7% y-o-y, 1.3% q-o-q). Realizations were down sequentially by 7.7% due to the sharp sequential decline in e-auction prices from Rs2,852/ton in Q4FY12 to Rs2,561/ton during the current quarter. This is due to weak international prices (down ~20% y-o-y). Volume share of EAuction/ Washed coal fell by 80bps y-o-y each to 12% and 2.9% respectively.
- OPMs declined on higher employee costs: Operating margins were impacted y-o-y (fall from 33.2% in Q1FY12 compared to 29.2% in Q1FY13) on higher employee expenses as a percentage cost to sales. Employee costs have gone up from 33.6% in Q1FY12 to 37.2% as a percentage cost to sales and up 25.8% y-o-y reflecting the impact of the wage settlement concluded during the previous quarter. Sequentially, employee costs are not strictly comparable to Q4FY12 on account of revaluation of actuarial liabilities in Q4FY12 and under-provisioning for wage revisions during 9MFY12.
- Increase in Penalty structure not very worrying: CIL revised its penalty structure from the earlier 0.01% to between 1.5 - 40%, depending on the level of shortfall. Consequently, CIL would be required to pay 1.5% of the shortfall value if coal delivered is between 65-80% of the Annual contracted quantity (ACQ), while in the worst case scenario, the penalty would be as high as 40% if CIL supplies below 50% of ACQ. Off-take below 80% (65% domestic and 15% imported) in the next couple of years looks less likely and should not bother CIL much.
- Price pooling concerns over done: Concerns pertaining to import of coal by CIL are overblown in the light of the fact that the price pooling pertains to replace the current import done by power utility companies with CIL. Power utilities imported ~45m tonnes of coal during FY12. Price pooling mechanism would enable utility companies to claim pass-through for the increased prices since the average prices (domestic and imported) would be notified by CIL. In the light of such a significant favour to the power sector, the sector may not object to any justified price increase by CIL.
Recommendation: Investors could look to buy the stock on dips of Rs324-Rs332 (13.5-14.0x FY13 core EPS + cash per share of Rs112) and (7.3x-7.6x FY13 EV/EBITDA) for a target price of Rs364 (16.0x FY13 core EPS + cash per share) & (8.8x FY13 EV/EBITDA) during the next quarter
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