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Coal India Rating: buy: Rise in e-auction premiums is a positive

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A JC Bamford Excavators Ltd. (JCB) front loader loads coal onto a freight wagon at the Tori Siding on the Tori-Shivpur rail line, operated by Indian Railways and funded by Coal India Ltd., in Chandwa, Jharkhand, India, on Thursday, May 17, 2018. State miner Coal India’s output and shipments jumped to seasonal records in June, buoyed by summer demand from power stations, the company’s biggest customers. Photographer: Prashanth Vishwanathan/Bloomberg

COAL’s Q2FY22 e-auction premiums were disappointing. However, the management highlighted that the current premium is over 50% compared to the 15.3% reported in its Q2FY22 result. It has re-started e-auction to non-regulated sectors, which should result in improved profitability. Mgmt expects a price hike to offset an increase in wages, given the current strong demand environment and high international coal prices.

The stock trades at 3.4x/3x FY22e/FY23e EV/Ebitda, with an attractive dividend yield of 11%. We value the stock at 4x FY23e EV/Ebitda with a TP of `200. We maintain our Buy rating, with a revised TP of `200/share (from `185 earlier). A surge in coal demand from the Power sector, which could squeeze supplies to non-regulated sectors through e-auctions, remains a key risk as it could hurt profitability.

Guidance for FY22 revised upwards
Its dispatch guidance for FY22 has been increased to 660-670mt compared to its previous guidance of ~640mt. This is in light of a recovery in demand, especially from the power sector. With a recovery in demand from the power sector, supplies to non-regulated sectors had been squeezed. The same has now begun to recover as both production and dispatches have improved post monsoon.

Our FY22 e-auction ASP at `1,650 is conservative, considering Q2 e-auction ASP of Rs 1,594/t (a 15.3% premium over FSA prices), while the current premium over FSA is ~50%. We see scope for an upward revision to our FY22 estimate, if current e-auction premiums sustain, provided volumes pick up.

Price hikes to offset wage cost push
COAL last raised prices in FY18. With wage negotiations underway, we expect COAL to immediately announce a price hike, which should cover the higher wage bill and leave room for margin improvement. Receivables have improved to Rs 120 bn from Rs 180 bn at the end of FY21, thus improving its liquidity position. COAL now carries a cash balance of ~`300 bn.

The stock is attractively available at 3.4x/3x FY22e/FY23e EV/Ebitda. While demand is likely to improve post monsoon, the second half of the fiscal is generally stronger compared to the first half for COAL. The strong dividend yield of ~11% supports the downside.

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