Coal India’s 1QFY17 EBITDA (ex-OBR) of INR38.6b (-24% YoY) was below estimate of INR43.4b on lower FSA realization. Grade mix deterioration impacted the realization. OBR provision continues under Ind-AS. PAT of INR30.6b (-19% YoY) was ahead of estimate of INR29b on lower than estimated OBR provisions. Other income was down 13% YoY to INR17.6b (in-line) due to lower cash and equivalents.

Continuously improving coal prices in the international market strengthen the case for import substitution, but the volume growth has been elusive so far perhaps because of falling specific consumption of coal in power plants and growth in supply of alternative fuels e.g. gas, Nuclear, Renewables. Non-power sector demand is likely to pick up, in our view. Uncertainties regarding (1) Impact of deteriorating grade mix on realization (2) exact quantum of wage hike pending negotiation and (3) volume growth are fueling volatility to earnings. Although we remain positive on long term prospect, the near term uncertainties are likely to de-rate the stock. Further, there is limited upside to the target price.They downgrade the stock to Neutral