Outlook improving on month-onmonth basis; maintain Buy
* Dispatches have increased for the fourth consecutive month in Aug’20 to 44mt (43mt in Jul, 42mt in Jun, 40mt in May and 39mt in Apr). We expect production and dispatch to pick up after the monsoon.
* EBITDA missed our estimates, dragged by high contractual and fuel costs. Contractual expenses came in at Rs35.2bn (+6% yoy/-22% qoq), significantly above our estimate of Rs18.3bn. Fuel cost at Rs6bn was also 16% higher than the estimate.
* Overburden removal (OBR) expenses stood at -Rs2.5bn, which is significantly lower than the estimate of Rs8 bn. The lower-than-expected OBR expenses help partly offset high contractual and fuel costs.
* The stock is currently trading at 3x FY22E EBITDA. We expect restoration of a 20% markup on e-auction prices from Oct’20 dispatches (provided demand recovers), which should trigger the next round of uptick in the stock. We maintain BUY with a TP of Rs208.
* Focus on Overburden removal:
Management had previously highlighted that in the downturn periods, it shall focus on removing the overburden and keep the coal seam ready for the next round of production uptick.We believe higher contractual expense might be on account of higher overburden removal.
* Clear dividend policy by year-end:
We believe that management will publish a dividend policy, which shall make it easy for investors to take a look at the dividend yield. We estimate dividend yield of 9.3% for FY22 and 11.7% for FY23.
The company has cash of Rs201bn, which translates into Rs33/share. We believe that with liquidation of receivables in H2, the cash position shall improve and management shall be in a position to declare a dividend. We expect a dividend of Rs9.5/sh in FY21 and Rs12 in FY22.
* Outlook and valuation:
With four consecutive months of growth, we expect Coal India to continue the uptick in production and dispatch in H2. We expect re-imposition of a 20% premium on e-auction prices from Oct’20. Q1FY21 premium is already at 18%. We maintain Buy with a TP of Rs208 based on 5x FY22 EV/EBITDA estimates.
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