Coal India rating – Buy: A much improved earnings performance

CIL reported A much improved earnings performance in Q2FY21 aided by (i) 9.4% y-o-y increase in sales volumes; (ii) reversal of OBR provision of Rs 5.7 bn; and (iii) a surprising 44% y/y increase in e-auction volumes despite weak auction prices (-29% y/y ). Improvement in e-auction premiums have been measured since Q2FY21, though the volume trajectory will likely look better due to a favourable base and improving demand. Maintain Buy; revised FV Rs 180 (from Rs 195).

Lower e-auction realisation dampened earnings
CIL reported revenues of Rs 195 bn (+3% y-o-y, +15% q-o-q), Ebitda of Rs 23 bn (+4% y-o-y, +47% q-o-q) and PAT of Rs 29.5 bn (-16% y-o-y, +42% q-o-q) against estimates of Rs 191.8 bn, Rs 13.5 bn and Rs 21.5 bn, respectively.

Higher-than-estimated Ebitda was largely on account of (i) reversal of overburden provision to the extent of Rs 5.7 bn, against a provision of Rs 5.8 bn factored in by us; and (ii) better-than-expected realisations due to 41% q-o-q increase in e-auction volumes at 22.4 mn tons, offset by 10% q-o-q decline in e-auction realisations at Rs 1,437/ton. We note that a reversal of overburden provision implies substantially higher overburden removal relative to coal production leading to a seasonally deteriorating strip ratio.

Moderation in employee cost (-5% q-o-q), as well as contractual expenses were compensated by increase in consumption of stores (+14% q-o-q). Higher effective tax-rate of 27% led to tax expenses increasing 47% y-o-y to Rs 11 bn resulting in PAT of Rs 29.5 bn in Q2FY21.

We highlight Coal India continues to struggle on account of piling receivables which have reached Rs 212 bn as of September 2020 from Rs 144 bn as of March 2020. Cash flow from operations remained negative for H1FY21 at `36 bn even as the company incurred capital expenditure of Rs 44 bn in H1FY21.

Operationally, production at 115 mn tons (+10.6% y-o-y) and sales at 134 mn tons (+9.4% y-o-y) had previously been reported, and look optically strong on account of favourable base effect as coal demand in Q2FY20 was affected by lower demand as well as extended monsoons.

Stay positive, with revised FV of Rs 180
CIL remains attractively valued at 5X P/E and 4X EV/Ebitda on adjusted earnings for FY2022e. We have revised our earnings for FY21/22e downwards by 11% and 3% to factor in continued weakness in e-auction prices in FY2021e at Rs 1,562/ton (from Rs 1,913/ton previsously) as well as revision in raw coal prices in FY2022e. Maintain Buy with revised FV of Rs 180/share (from Rs 195/share) based on March 2022e earnings.