One-off quarter due to operating deleverage; improvement already underway
Coal India’s (CIL) Q1FY21 PAT declined 55.1% YoY to Rs20.8bn mainly due to lower revenues and operating deleverage on the back of higher contractual expenses due to higher OBR (preparing for higher production in the coming months), all of which is expected to normalise in the coming quarters. Other income was lower as cash balance declined with mounting receivables. Revenues fell 25.9% YoY to Rs184.9bn with decline in both offtake (by 21.5% YoY) and average realisation (by 6.7% YoY) as well as inventory liquidation. We remain positive on the stock since Jul-Aug’20 witnessed significant growth in production and offtake, and better e-auction premiums. Expenses, booked as normal, are expected to improve operating leverage from Q2FY21. Also, liquidation of dues helped by the PFC/REC scheme is expected to restore cash balance to pre-Covid levels. Although our volume estimate for FY21E remains at 580mnte, CIL is confident of exceeding it. We maintain our BUY rating on the stock and target price of Rs258.
* Q1FY21 result – Key takeaways:
* Production/offtake was 121mnte/120.4mnte, down 11.6%/21.5% YoY.
* Revenues declined 25.9% to Rs184.9bn due to contraction in average realisation by 6.7% YoY to Rs1,412/te. Lower offtake from non-power segment resulted in change in volume mix while inventory liquidation on lower premiums impacted realisations.
* Average realisation shrunk mainly due to decline in FSA realisations by 0.8% YoY to Rs1,359/te as non-power customers temporarily shifted to e-auction due to the discounts offered. FSA volumes fell 21.6% to 102.2mnte.
* E-auction realisation was 25.9% YoY lower at Rs1,598/te due to sale at notified prices and change in sales mix. E-auction volumes were down 16.7% to 15.9mnte.
* Although, on YoY basis, operating expenses for Q1FY21 were 10% lower, it did not reflect the decline in revenues mainly due to higher contractual expenses (up 6% to Rs35.2bn) on the back of higher OBR activity. This is expected to normalise from Q2FY21 onwards since higher OBR was mainly to prepare for the upcoming demand. Consequently, Q1FY21 EBITDA declined 53.8% YoY to Rs30.5bn. EBITDA margin was at 16.5% vs 26.5% YoY. EBITDA ex-OBR was down 62.7% YoY to Rs28bn.
* Expect good recovery from Q2FY21 onwards: Aug’20 production/offtake was up 7.1%/9.3% YoY resulting in 5MFY21 figures improving significantly to -9.7%/-18. We expect the improving trend to continue as coal inventories at power plants decline (21 days currently) and their PLFs improve on higher demand. Operating leverage will also come into play as costs, especially those related to OBR, moderate. CIL is better prepared this year to tackle disruptions due to monsoons. Also, liquidation of dues helped by the PFC/REC scheme will restore cash balance (Rs230bn vs Rs288bn at FY20-end) to pre-Covid levels, helping improve other income.
* Valuation: We maintain our BUY rating and target price of Rs258 valuing CIL on DCF basis with a peak production of 850mnte from FY29E onwards. Although our volume estimate for FY21E remains at 580mnte, CIL is confident of exceeding it.
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