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Volumes continue to recover

Valuations remain attractive; dividend yield at 10%

Another month of improved offtake

* COAL reported another month of strong offtake in dispatches, with volumes at 55.1mt, registering a 37.6% YoY increase in May’21. For the first two months of FY22, COAL’s offtake now remains higher by 38% YoY. Offtake growth in May’21 comes on the back of: a) a 15% rise in coal-based generation (based on initial data from POSOCO), amid a 7% rise in overall Power demand, and b) re-stocking of inventory at Power plants (up 5mt MoM).

* COAL’s production increased a modest 1.7% YoY to 42.1mt (YTD: 3% YoY). This though is on expected lines, amid the large inventory lying at its mines.

* While there are uncertainties over demand amid stricter restrictions – and rightly so – power demand in May’21 was also impacted by unseasonal weather conditions. Over the past fortnight, demand has shown signs of an uptick (+10%), with some normalization in demand from the western region. Inventory at Power plants is still low at 29mt (16 days of consumption) and we expect it to provide support to COAL’s offtake.

Signs of a recovery in e-auction realizations

* The onset of COVID-19 in India had come at a time when inventory at both COAL’s mines and Power plants were at already high levels. This, coupled with the must-run status of renewables, meant demand for coal bore the brunt of weakened activity. This led to a sharp decline in e-auction realizations.

* With a recovery in demand, e-auction premiums and realizations have shown signs of an improvement. We expect this to eventually seep in (given some lag between allocation and dispatches) and improve as inventory levels at COAL’s mines reduce. e-auction realization for COAL | 9MFY21: INR1,488/t, 3Q: INR1,466/t.

* Global thermal coal prices have been on an uptrend (Exhibit 7), which is encouraging for e-auction realizations. We conservatively build in e-auction realizations of INR1,650/t for FY22E (FY21E: INR1,512/t; FY20: INR 2,177/ t), but note upside risks if domestic demand and international prices sustain.

Operating leverage at play; maintain Buy

* A large proportion of COAL’s costs are fixed in nature, with employee cost accounting for ~55% of the company’s expenses. Besides COAL has also focused on OBR (overburden removal) activities, thereby utilizing contractual employees (~20% of the company’s expenses).

* With improving offtake and realizations, we see a sharp operating leverage coming into play. Notwithstanding any further negative shocks, we expect COAL’s profitability to recover sharply in FY22 (+29% YoY). Recovery in demand and funds from the Atmanirbhar scheme should help alleviate concerns on stretched receivables.

* At 2.8x FY22E EV/EBITDA and 6.4x FY22P/E, along with a dividend yield of 10%, COAL remains attractively valued and implies a PV of just 10 years of its future cash flows. We maintain a Buy on COAL with a TP of INR180/share, based on 3.5x FY22E EV/EBITDA.

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