Stock Market Result Update on Coal India for 1QFY2012

Stock Market Result Update on Coal India for 1QFY2012 with a Neutral recommendation.

For 1QFY2012, Coal India’s (CIL) net profit came in above our expectations mainly on account of lower-than-expected costs. However, given the rich valuations, we continue to maintain our Neutral view on the stock.

Strong performance led by higher coal prices: CIL’s net sales increased by 21.4% to `14,499cr in 1QFY2012 mainly driven by higher realisations (+15.8% yoy to `1,368/tonne) and supported by increased offtake (+4.9% yoy to 106mn tonnes). Despite fall in coal production, coal sales volumes increased mainly due to inventory liquidation of 10mn tonnes. The increased offtake was aided by higher availability of railways rakes to 168 rakes/day in 1QFY2012 (+9.1% yoy).

Decrease in some costs aid EBITDA growth: Social overhead and other expenses fell by 37.4% and 32.6% yoy to `293cr and `438cr, respectively in 1QFY2012. EBITDA margin expanded by 985bp yoy to 35.3%, mainly driven by higher realisations. Thus, EBITDA grew by 68.5% yoy to `5,116cr. Other income grew by 32.4% yoy to `1,559cr and tax rate declined 197bp yoy to 30.4%. As a result, net income increased by 64.1% yoy to `4,144cr.

Outlook and valuation: We expect CIL’s volume growth to remain muted in the wake of stricter government regulations on mining companies. Also, we believe any further chances of rise in coal prices by CILwill be only in case its wage revisions exceed its estimates. At the CMP, the stock is trading at 11.5x FY2012E and 10.2x FY2013E EV/EBITDA. We believe the current price level fairly discounts the robust business model and steady volume growth over the medium term. Hence, we maintain our Neutral view on the stock.