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Awaiting price hikes

Coal India (COAL IN) reported lower than expected EBITDA ex OBR at Rs45.9bn (CentrumE: Rs72.5bn), though up 64% YoY. The deviation was primarily due to higher than expected CoP at Rs1,290/t (CentrumE: Rs1,130/t), flat YoY, and lower e-auction prices. We expect COAL to increase prices under FSA route within CY21, which will more than offset any increase in employee cost. We maintain our estimates (FY21-23E EBITDA CAGR of 18% to Rs280bn in FY23E) and target price of Rs200, valuing COAL at 4x FY23E EV/EBITDA. Reiterate BUY.

EBITDA up 64% YoY and EBITDA/t up 23% YoY on low base

EBITDA ex-OBR increased 64% YoY to Rs45.9bn primarily due to low volume base owing to nationwide-lockdown in Q1FY21. Coal sales volume was 160mt, up 33% YoY.

E-auction contributed ~18.8% of volume (30.2mt, up 90% YoY) v/s 13% in Q1FY21. However, due to lag effect, e-auction prices realized in Q1FY22 were lower at Rs1,569/t (Q4FY21: Rs1,752/t; Q1FY21: Rs1,598/t). FSA price was up 2.6% YoY at Rs1,394/t. During Q1FY22, employee cost was up 8.3% YoY to Rs103.9bn, primarily due to one-off provision of ~Rs6bn related to post-retirement medical benefits of non-executives. The rise in diesel price led contractual cost/t to increase by 19% YoY to Rs127/t of overburden removal. CoP ex-employee cost was Rs642/t, up 27% YoY. As a result, COAL recorded EBITDA/t of Rs286, up 23% YoY.

Wage negotiations with non-executives underway

COAL is negotiating with non-executives, as the pay revision is due from 1 July 2021. Management will start making provisions from Q2FY22. We expect FY22 employee cost to increase by ~7% YoY to Rs413bn.

Expect price hikes under FSA and volume uptick to drive earnings in H2FY22

The company is witnessing strong demand trend, which is likely to continue in the rest of FY22, barring any Covid-related disruption. Management indicated strong possibility of taking price hikes under FSA within CY21. Besides, the new e-auction volumes booked for September deliveries are at higher price of Rs1,700-1,800/t (vs 1,569/t in Q1FY22), which would reflect in Q3FY22 and Q4FY22 numbers. The current E-auction premium stands at 30% over base price. The higher prices coupled with volume uptick are expected to drive earnings in H2FY22.

Reiterate BUY with target price of Rs200

We expect profitability of COAL to increase in FY22E, with expected price hikes under FSA in Q3FY22. This would offset any unforeseen impact due to wage revision on profitability. Despite continuous high capex (Rs150bn/year), we expect free cash flow of ~Rs121bn (~Rs19.6/share) in FY22E and ~Rs171bn (~Rs27.7/share) in FY23E, most of which can be distributed as dividend. We expect DPS of Rs20 in each of FY22 and FY23 (dividend yield of 14%). We maintain our target price of Rs200, valuing COAL at 4x FY23E EV/EBITDA. Reiterate BUY.

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