In-line; e-auction offset drag of power sector priority
Earnings CAGR of 30%; valuations attractive; reiterate BUY
* Coal India’s (COAL) 3QFY18 revenue grew ~6% YoY to INR216b (2% miss) on ~7% YoY growth in offtake. FSA realization at INR1,182/t (down 8% YoY / 3% QoQ) missed our estimate of INR1,249/t, which we believe is due to lower dispatches to non-power customers (these fetch a premium). Preference was given to the power sector due to spike in demand. E-auction realization surprised positively, increasing 24% QoQ to INR1,998/t (our estimate: INR1,800/t), which finally reflected the rising price trend for 6-8 months.
* Adjusted EBITDA (ex-OBR) increased 19% YoY to INR55.4b (in-line) aided by slightly lower cost of production. Though we are keeping overall estimates unchanged, we have increased e-auction prices at the cost of FSA realization, accounting for temporary priority to the power sector. Valuations attractive; reiterate BUY
* We believe COAL will continue to be the key fuel for electricity generation growth in India for 5-10 years at the least. Solar power is the only viable competition but its growth will be capped by land shortage and variability. Therefore, we believe COAL will be able to achieve 6-7% volume growth.
* Concerns around grade slippage and wage hike are now behind. COAL is planning to move to GCV-based pricing, in line with the global practice. This is unlikely to impact margins because some consumers may pay less, but there will be another set of consumers who will have to pay more. Volume growth, operating leverage, closure of unviable underground mines and high natural attrition are key drivers of earnings. We expect 30% earnings CAGR over two years (FY18-20E). Valuations are attractive at 5.4x FY20E EV/EBITDA and 5-8% dividend yield. We value the stock at INR401/share based on 7.5x FY20E EV/EBITDA. Reiterate Buy
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