Coal India (Q2 FY12)

CMP Rs323, Target Rs353, Upside 9.7%

• Q2 FY12 revenue of Rs131bn was 24.5% higher on a yoy basis. The increase in revenue was largely driven by higher realisations. Realisation during the quarter were higher by 24.5% yoy and 2.8% qoq to Rs1,403/ton. The increase in realisation was due to the price hikes taken in mid-Q4 FY11 and higher proportion of e-auction sales. Realisations on coal sold through e-auction increased from Rs2,245/ton in Q1 FY12 to Rs2,435/ton. Dispatches for the quarter were lower higher by 4.7% yoy to 93.7mn tons. Production too was lower by 11.2% on yoy basis to 80.3mn tons. The decline in offtake and production was due to heavy rainfall in the region. The company is 26mn tons behind its target volumes for FY12.
  

• Operating profit for the quarter surged 33.3% yoy to Rs24.8bn on the back of improved realisations. EBIDTA/ton in Q2 FY12 stood at Rs264, higher by 39.9% on a yoy basis, but lower by Rs41.7% on a qoq basis. The improvement in EBIDTA/ton was largely on account of higher realisations, as cost too was up 21.4% yoy and 25% qoq. The jump in costs was largely due higher employee costs and increase in stores and spares. The company has made provision of Rs7.5bn (Rs30bn on a full year basis) for the increase in employee costs. Stores and spares increased due to higher diesel costs and rise in costs of explosives. 

• The growth in PAT in was higher than that of operating profit due to a sharp jump in other income. Other income of Rs17.9bn was 55% higher on a yoy basis and 15.1% on a yoy basis. Tax rate for the quarter was 30.2%, inline with the company’s guidance.
  
• The management has lowered its FY12 production volume guidance to 448mn tons and offtake target to 452mn tons from its earlier guidance of 454mn tons. In order to achieve its guidance the company needs produce 272mn tons in H2 FY12, which we believe would be tough task. The company has indicated that out of the 4mn tons e-auction coal which was supposed to be sold to the power producers at FSA prices, the power companies have lifted only 0.3mn tons. The company now plans to sell this coal through e-auction over the next two months.  Rake availability for Q2 FY12 stood at 147 rakes/day, which has increased to 168 rakes/day in October and 178 rakes/day in November. Production and offtake in October stood at 33mn tons. 
  
• Coal India has corrected over the last two months after being one of the best performers since its listing. The correction in the stock has been led by expectations that the government would levy the 26% profit sharing clause under the new mining bill on Coal India. In addition to this, concerns over wage negotiations and the company’s ability to raise coal prices under FSA have kept the stock under pressure. 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. On account of the lack of positive triggers in the near term, we recommend a Market Performer rating on the stock with a revised 9-month price target of Rs353.