Coal India (Q1 FY12)

CMP Rs385, Target Rs412, Upside 7%

• Q1 FY12 revenue of Rs145bn was 26.8% higher on a yoy basis. The increase in revenue was largely driven by higher realisations. Realisation during the quarter were higher by 21.2% yoy and 3.8% qoq to Rs1,367/ton. The increase in realisation was due to the price hikes taken in mid-Q4 FY11 and higher proportion of e-auction sales. Sales volume though e-auction increased from 9.3mn tons in Q1 FY11 to 11.4mn tons. Dispatches for the quarter were higher by 4.6% yoy to 106mn tons. However, production was largely flat on yoy basis. The improvement in dispatches was due to 10mn tons of inventory liquidation. Higher availability of rakes aided the company in liquidating its rising inventory at the mines. 
  
• Operating profit for the quarter surged 58.7% yoy to Rs48.2bn on the back of improved realisations. EBIDTA/ton in Q1 FY12 stood at Rs455, higher by 51.7% on a yoy basis and flat on a qoq basis. The improvement in EBIDTA/ton was largely on account of higher realisations, as cost too was up 10.1% yoy and 6% qoq. Surprisingly, employee costs increased by 12.4% on a yoy basis and 6% on a qoq basis, even though provisions for wage hike come into effect in Q2 FY12. Social overhead (welfare) expenses were partially reclassified as employee expenses.

• The growth in PAT in was higher than that of operating profit due to a sharp jump in other income. Other income of Rs15.6bn was 32.4% higher on a qoq basis and yoy basis. Tax rate for the quarter increased to 28.5% from 22% in Q1 FY11, but was inline with the company’s guidance.
  
• The management maintains its FY12 production volume guidance of 454mn tons. In order to achieve its guidance the company needs ~190 rakes per day from the railways. However in Q1 FY12, the rake availability has gradually declined from 177.4 rakes in April to 162 rakes in May and then 160 rakes in June. We believe it would be a tough task for the management to meet its target production of 454mn tons.
  
• Coal India has been one of the best performers since its listing and has outperformed most of its peers as well as the key benchmark indices. Incrementally, we do not expect significant positive developments over the next one year, especially on both coal price increases as well as coal volumes. We believe it will difficult for Coal India to meet its volume guidance and also raise prices before completing wage negotiations. The recent mining tax bill has created uncertainty about the potential earnings impact on Coal India. On account of the lack of positive triggers in the near term, we recommend a Market Performer rating on the stock with a 9-month price target of Rs412.