01 December 2013

Coal India - Better pricing and volumes ahead, retain Buy :Centrum

Better pricing and volumes ahead, retain Buy
We retain Buy on Coal India with a reduced target price of Rs320 as we i) see
current valuations undemanding at 4.8x FY15E adj. EV/EBITDA, ii) strong demand
outlook and better pricing ahead for H2 and iii) concerns on lower e-auction
volumes and FSA supply shortage being overdone. Q2 performance was below our
expectations due to weak realizations (impacted by inferior grade and inventory
sales) but we expect better pricing and a sharp uptick in volumes in H2. We
maintain our volume estimates for FY14E/15E at 484MT/508MT and lower our
blended realizations by 2.2%/1.9%. Maintain Buy with a reduced target price of
Rs320. Strong dividend yield of ~5.5% is an added plus.
Realizations to improve on better mix and quality: CIL’s blended realizations
were hit due to higher quantity of inferior quality coal in the product mix in Q2 and
stood at Rs1413/t (lower by 1.4% YoY, ~4% below expectations). We expect
realizations to improve going ahead on better product mix and quality (from freshly
mined coal going forward) as inventory liquidation of lower grade coal has come to
an end. Realizations for FSA coal stood at ~R1262/t, down 1.5% YoY. Realizations for
e-auction coal dropped by 9.7% YoY to Rs2220/tonne and the premium of e-auction
coal over FSA coal stood at 72%.
Higher costs keep margin under pressure: CIL has seen costs going up on
account of employees, contractual labour and power & fuel (diesel) charges. CoP
stood at Rs1156/t for Q2 (flat YoY but higher by 6.6% QoQ). EBITDA margin fell to
18.1%, lower by 150bps YoY and EBITDA/tonne dropped to Rs256 (down by ~9%
YoY). We expect sharp recovery in margins in H2 as per past trends for CIL on the
back of higher volumes and better pricing.
Earnings revised downwards but outlook remains strong: CIL’s future outlook
remains strong due to robust demand and production growth from new and ongoing
projects. Better product mix (as inventory clearance is over) and full impact of
price hikes will be seen from Q3 and e-auction realizations are likely to be higher
sequentially too on better demand and higher import parity coal prices for eauction
buyers. We maintain volume estimates for FY14E/15E to ~484MT/508MT
but cut our blended realizations by 2.2%/1.9% to factor in lower e-auction
realizations and higher sales to power sector. We adjust our costs higher and revise
our EBITDA estimates downwards by 11%/13.5% for FY14E/15E.
Valuations - attractive: We remain positive on volume growth with strong
domestic demand, better railway logistics and expected uptick in pricing going
ahead led by better product mix. We find the stock trading at cheap valuations of
FY15E adj. P/E of 9.6x and FY15E adj. EV/EBITDA of 4.9x (~20% discount to global
peer average). Maintain Buy with a reduced target price of Rs320. Key risks are lower
volumes due to rake shortage & production issues, penalties on new FSAs due to
large shortfall in supply and impact of mining tax levy from the new mining bill.

Pfizer - Wyeth Merger :Centrum

Rating: Buy; Target Price: Rs1,530; CMP: Rs1,605; Upside (ex-interim.div.) 22.9%





Set to derive synergies of merger



We maintain Buy rating for Pfizer with a price target of Rs1530 (excl.
interim div. of Rs360) from Rs1640 due to the announcement of merger
with Wyeth. We expect the merged entity to rank second among the MNC
pharma companies with MS of 2.9% in the domestic pharma market. The
merged entity will have 13 brands in the top 300 and will be able to
attract the best talent. We have revised our FY14 and FY15 EPS
estimates based on the merger ratio of 7:10. Our target price is based
on 18x Sept’15 EPS of Rs84.8. Key risks to our estimates are slowdown
in the domestic pharma market and lower demand for the company’s
products.