• Coal India's Q3 FY14 were below our estimate due to a sharp jump in contractual expenses

• During the quarter offtake decreased by 2.7% yoy to 117mn tons due to the Cyclone Phalin; Production increased 1.1% yoy to 118.7mn tons

• Realisations were higher by 0.5% at Rs1,444/ton due to higher FSA prices. Realisations also increased 2.3% qoq due to improvement in mix and higher washed coal prices

• EBIDTA/ton of Rs350 was lower by 1.6% yoy due to higher diesel prices and lower market linked realisations

• Lower rating to Market Performer with a revised price target of Rs290 (adjusted for dividend). 

Topline declines 2.3% on account of lower volumes

Coal India's revenue was lower by 2.3% yoy to Rs169bn, inline with our estimate. The impact of lower volumes on topline was some what offset by an increase in blended realisations. Average realizations for the company increased by 0.5% yoy to Rs1,444/ton due to a 3.8% yoy increase in FSA prices. FSA prices improved on a qoq basis by 1% due to recovery of mix. E-auction prices remained flat on a qoq basis at 0.5%, which was a positive surprise for us. We were expecting e-auction prices to be marginally lower qoq. Washed coal prices too were strong at Rs2,430, up by 4.4% qoq, indicating a rebound in demand for market linked sales volume. Coal offtake was lower by 2.7% yoy to 117mn tons as transportation was impacted by the Cyclone Phalin. Production growth during the quarter was restricted at 1.1% yoy to 117.2mn tons. Offtake for the quarter was 4.7% lower than the company's target and that of production was lower by 3.9%. 

EBIDTA/ton decline continued due to high diesel prices and jump in contractual expenses

Coal India reported a 4.3% decline in operating profit largely on account of lower volumes and an increase in diesel prices. Operating profit was further impacted by a jump in contractual expenses. OPM for the quarter shrunk by 51bps yoy to 24.2%. Operating costs per ton of coal increased 1.1% yoy to Rs1,094/ton on account of high diesel prices and an power & fuel costs. Stores and spares costs jumped 13.7% yoy due to an increase in diesel prices. The management said that stores & spares costs would remain around current levels. Contractual expenses too increased by 21.3% yoy due to higher diesel costs and an increase in contract prices. EBIDTA/ton for the quarter was Rs350/ton, lower by 1.6% yoy. It was also lower than our estimate of Rs369/ton.

The overhang of Government's Follow on Public Offer (FPO), the Presidential directive to sign FSAs with power producers and lower market linked prices have resulted in Coal India underperforming the indices over the last one year. With the Special dividend from the company, the overhang of the FPO has vanished. Realisations under e-auction sales and washed coal sales are near their bottom, and any increase in global coal prices would lead to higher realisations for CIL. The price hikes indicates the company's ability to pass on the increased costs to maintain profitability. Earnings are expected to improve FY15 onwards on the back of higher volumes, marginal increase in e-auction prices and price hikes taken by the company during the year. At the CMP, company trades at 5.9x FY15 EV/EBIDTA, lower than its historical average of 7.8x. Post the special dividend we have reduced out price target to Rs290 and lower our rating to Market Performer.