Key takeaways from Coal India’s (CIL’s) Q4FY21 conference call: 1) Although demand was impacted between March and May’21, YTDFY21 production and offtake have been robust on account of restocking, 2) FY22 offtake target is now 660mnte, which is achievable, 3) capex will remain at Rs 150 billion each in FY22 & FY23 mainly on replacement of equipment, land acquisition and evacuation projects; FY24 onwards, capex will depend on coal demand and will be primarily for land acquisition and mine development, 4) CIL is working on reducing receivables further from Rs 170 billion to Rs 120-130 billion, 5) FY22 e-auction volume target is 130-140mnte; premiums can improve to 20-25% levels, 6) it will award eight-10 more mines through MDO route in FY22, which will help cut costs, 7) wage revision negotiations are ongoing; impact will only be 2-3%, and 8) merging of e-auction will bring in higher transparency and efficiency as well as reduce cost. Maintain ‘buy’.
Demand and manpower were impacted due to the second Covid wave and lockdowns. Demand reduced suddenly in Mar’21 as power plants had high inventories and curbed offtake. Till Jun’21 YTD, despatches and production have been robust.
Offtake target: CIL has revised its offtake target for FY22 downwards to 660mnte, based on factors including power demand, covid-related disruptions, import substitution etc.
YTDFY22, CIL has exceeded past year’s offtake by 36mnte. Thus, if CIL ends H1FY22 with 45-50mnte higher offtake volumes YoY, 660mnte will be achievable. Reduction in manpower in FY22E is targeted at 13,000-14,000 YoY. Had there not been any wage negotiations, reduction would have reduced wage cost by 3% YoY. Even 5-7% increase in wages may impact the wage expense only by 2-3% on FY21 expense. Gratuity increased by Rs 10 billion in Q4FY21, which resulted in 14% increase in wage cost.
Price hike: CIL is deliberating on taking a price hike and will make a decision soon. Valuation methodology and risks: We maintain ‘buy’ rating and target price of Rs 234 on CIL with offtake estimates at 630mnte/660mnte for FY22E/FY23E. We value CIL on DCF basis with peak production of 850mnte FY29E onwards.
The stock is currently trading at 5.1x P/E and 2.7x EV/EBITDA on FY23E basis with 39% RoE.
Capex: Negligible expenditure in diversification projects. There will be capex on 100MW GUVNL solar project, on 70:30 D:E basis, where total equity requirement will be Rs5bn in case CIL wins 100-300MW more during the year. Acquisition of land, R&R, FMC projects for evacuation of coal and railway lines and sidings will take up most capex.