Coal India: Maintain ‘buy’ with target price of Rs 158

Coal India’s (CIL’s) December 2020 operating performance was subdued with offtake down 2% year on year (YoY) to 52.6mt, while production volume was slightly up at 58.3mt. Key points, offtake growth slowed at all subsidiaries, though MCL and NCL continue to stand out. Production uptick sustains at CCL and NCL. Inventory is up at 57.7mt.

Taking cognisance of December performance, we believe it will be challenging for CIL to exceed FY20 volume of 582mt. Further, cash accretion challenges mount as receivables from power sector are up at Rs233 billion (November-end). That said, we find dividend yield and valuation attractive. Maintain ‘buy’ with target price of Rs158.

CIL’s operating performance was relatively subdued owing to high base of the prior year. Offtake was down 2% YoY to 52.6mt as growth tapered off at all subsidiaries, except NCL. That said, MCL continues to stand out at 11% Y-o-Y growth. YTD December 2020 offtake implies that MCL (106.4mt) has outperformed the largest subsidiary — SECL (98.5mt). On production front, however, performance is better with production at 58.3mt (up 0.5%YoY). Going ahead, we expect higher base to thwart offtake growth if demand by power sector does not revive. Hence, we estimate FY21 volume to be lower compared to FY20.

We expect CIL’s profitability to improve as e-auction volume has improved in H2FY21. YTD November 2020, e-auction volume (offered) is up 77% YoY at 68.3mt, though average premium is down to 12.3% versus 31.6%. That said, e-auction premium is up from YTD September 2020 level of 9%. However, we are concerned on cash accretion as receivables from the power sector continue to rise. As on November 2020-end, receivables from the power sector (mostly state-owned companies) stand at RS233billion — almost 27% of market cap.

CIL’s operating performance for December was subdued owing to high base. In our view, it will be difficult for the company to achieve FY20 volume if demand from the power sector continues to stay lacklustre. That said, we expect profitability to improve sequentially due to volume/price uptick in the e-auction segment. Escalating receivables remain our primary concern as it severely impacts cash accretion.

While we believe dividend yield of ~10% is still possible, investors’ concern around possible delinquencies is likely to keep stock performance subdued. We maintain ‘buy/so’ with TP of R158 on 7.2x FY22E EPS. The stock is trading at an undemanding 5.9x FY22E EPS.