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Better than expected realizations, lower cost drive beat

Valuations attractive; dividend yield at 11%

* COAL’s result highlights a sequential recovery in e-auction realizations. This, combined with lower-than-expected costs, led to a beat on our numbers. Adjusted EBITDA (excluding OBR) at INR80b was 38% ahead of our estimate.

* For the first two months of FY22, COAL’s dispatches are up 38% YoY. With improving offtake and realizations, we see operating leverage coming into play in FY22. Notwithstanding any further negative shocks, we expect COAL’s profitability to recover in FY22 (+23% YoY). Capex run-rate is likely to increase in the near-term, but higher dispatches and some normalization in receivables should aid cash generation and help maintain dividend (dividend yield: 11%). We reiterate our Buy rating with a TP of INR185/share, based on 4x FY22E EV/EBITDA.

Beat on improved e-auction realizations and lower costs

* COAL’s adjusted EBITDA (excluding OBR) fell 16% YoY to INR79.7b, but was 38% ahead of our estimate of INR57.8b. Higher than expected revenue, coupled with lower than expected cost, led the beat.

* Revenue at INR267b fell just 3% YoY (5% ahead of our estimate). Realizations in both the FSA and e-auction segments were better than our expectations. Other operating income (related to income for transportation and evacuation) rose 11% YoY to INR22b.

* e-auction realizations recovered to INR1,752/t (3Q: INR1,466/t; 9MFY21 average: INR1,488/t). With global thermal coal prices on an uptrend and inventory at COAL’s mines reducing, we see signs of positive offshoots developing for realizations.

* Cash costs (excluding OBR) were up just 2% YoY at INR1,001/t (9% lower v/s our estimate of INR1,103/t). Employee costs were flat on a YoY basis, while other expenses saw an 11% decline.

* PAT declined 1% YoY to INR45.9b and was 45% ahead of our estimate of INR32b, led by the beat on operational numbers.

* PAT declined 24% YoY to INR127b in FY21 on the back of lower realizations. Cash flow from operations, though, stood at INR106b (v/s INR41b) as the FY20 had seen a sharp impact on WC.

* Overall dispatches in 4QFY21 rose 1% YoY to 165mt, while production fell 5% YoY to 203mt.

* FSA volumes fell 5% YoY to 133mt (est. 129mt). FSA realization fell 4% YoY to INR1,392/t (est. INR1,368/t). e-auction volumes jumped 38% YoY to 29mt (est. 31mt). e-auction realization fell 17% YoY to INR1,752/t (est. INR1,609/t).

* Receivables stood at INR196b at the end of FY21 and declined sequentially v/s INR216b in Jan’21. However, overall receivables remain high at 80 days (FY20: 55 days).

* Final dividend stood at INR3.5/share, resulting in a total dividend of INR16/share for FY21.

Key takeaways from the management interaction

* The management said it may need to revise its earlier dispatch/production targets of 740mt/670mt for FY22. Of this, 130-140mt was set for e-auction. As per the company, dispatches would depend on how Power demand and a likely third COVID wave pans out. On a normalized level, COAL expects its dispatches to increase by 40-50mt annually.

* COAL expects capex to be at INR170b for the next couple of years. This comes on the back of replacement of machinery. Works for R&R, first-mile connectivity, evacuation, and land acquisition would contribute to capex. As per the company, this run-rate should not sustain post FY23 and may even be lower, although much depends on overall demand

Valuations remain attractive, maintain Buy

* A large proportion of COAL’s costs are fixed in nature, with employee cost accounting for ~55% of total expenses. The management has focused on OBR (overburden removal) activities, thereby increasing use of contract employees (~20% of total expenses).

* Demand has been improving, with COAL reporting a 38% YoY increase in dispatches for the first two months of FY22. With improving offtake and realizations, we see operating leverage coming to play in FY22. Notwithstanding any further negative shocks, we expect COAL’s profitability to recover in FY22 (+23% YoY). Capex run-rate is likely to increase in the near-term, but higher dispatches and some normalization in receivables should aid cash generation and help maintain dividend (dividend yield: 11%).

* At 3.2x FY22E EV/EBITDA and 6x FY22E P/E, COAL remains attractively valued and implies a PV of just 10 years of future cash flows. We maintain our Buy rating on COAL with a TP of INR185/share, based on 4x FY22E EV/EBITDA.

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