Coal India: Maintain ‘buy’ with revised FV of Rs 185/share

Weak realisations. Coal India reported weak performance as realisation for raw coal (contributing 80% by volumes) declined to Rs 1,354/ton (-4% yoy) leading to flat revenues of Rs217 billion despite 8.7% y-o-y growth in overall dispatches in Q3FY21. Strong e-auction volumes (+177% yoy) despite weak premiums (25% in 3QFY21) continued to salvage earnings over the past few quarters. Sustained improvement in dispatch volumes continues to remain the key earnings driver for CIL. Maintain ‘buy’ with revised fair value (FV) of Rs185/share (from Rs180/share earlier).

CIL reported revenues of Rs217 billion (+1% yoy, +11% qoq), ebitda of Rs32 billion (-5% yoy, +38% qoq) and PAT of Rs30.8 billion (-21% yoy, +4% qoq) against our estimates of Rs223.8 billion, Rs32.5 billion and Rs36 billion, respectively. The revenue miss was largely on account of lower blended realisations of Rs1,411/tonne (-7.4% yoy, -3% qoq) due to continued weakness in e-auction realisations at Rs1,466/tonne (-44% yoy,+2% qoq) though the same was off-set by substantially higher e-auction volumes of 27 million tonne (+177% yoy, +22% qoq) thereby cushioning the impact on revenues.

Costs were largely contained barring social overhead expenses, while a lower overburden provision made good the weakness in revenue performance to deliver an in-line ebitda of Rs32 billion. Higher effective tax-rate of 35% led to tax expenses increasing leading to a miss in PAT estimates. Operationally, production at 157 mn tonne (+6.3% yoy) and sales at 154 mn tonne (+8.7% yoy) had previously been reported, and look optically strong on account of favorable base effect as coal demand in 3QFY20 was affected by lower demand.

We highlight that Coal India continues to struggle to recover piling receivables, which have reached Rs215 billion as of December 2020 from Rs144 billion as of March 2020. Management highlighted that further increase in receivables has largely been contained with the company receiving a major portion of billing from October 2020. With capex of Rs49 billion incurred in Q3FY21, cash balance with the company was at Rs120 billion as of December 2020.

CIL remains attractively valued at 6.6X P/E and 5.5X EV/ebitda on adjusted earnings for FY2023E. We have revised our earnings for FY2021E/2022E by +7.3% and -1.8%, respectively, to factor higher volumes and an increased proportion of e-auction sales as well as lower provisioning for overburden in FY2021E, partially off-set by higher interest cost. Maintain ‘buy’ rating and revise FV to Rs185/share (from Rs180/share) based on March 2023E earnings.