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Good showing; wage, price hike awaited

Coal India (CIL) posted Q3FY22 EBITDA of INR68.3bn (up 32% YoY/73% QoQ), ahead of our and Street’s estimates. Key points: i) Volume uptick and improved e-auction premium led to earnings growth. ii) FSA volume shot up 23% QoQ to 144.6mt as the company concentrated on regulated sector. iii) Provisioning of INR1bn/month towards wage hike. iv) Receivables down to INR150bn at Dec-21-end. Going ahead, we expect robust e-auction premium and improving volume to boost CIL’s performance. We expect the price hike to offset the wage escalation. Besides, focus on reducing receivables is likely to maintain cash accretion. We retain ‘BUY’ on the stock with a TP of INR200/share at 9x FY23E EPS.

Sound performance driven by higher volume and e-auction price

CIL’s Q3FY22 EBITDA of INR68.3bn is the highest since Q4FY19. Key points: i) FSA volume moved up 23% QoQ at 144.6mt as the company increased focus on regulated sector. ii) E-auction premium at 42% is the highest since Q4FY20 as imported coal price surged. iii) Positive operating leverage due to higher volume led to EBITDA/t at INR393—up 47% QoQ/17% YoY. iv) Second dividend of INR5/share on healthy cash balance of INR280bn as on Dec-21-end. Going ahead, we expect CIL”s earnings momentum to sustain due to focus on increasing volume and robust e-auction premium: 103% in Jan-22.

Wage escalation and price hike likely to offset each other

On the earnings call, management indicated that a price hike is imperative and certain subsidiaries are in such a critical position that coal production might be impacted in case the price hike is delayed further. On wage hike, management mentioned that the negotiations are going on; however, it is unlikely to conclude anytime soon. Pending the conclusion of wage negotiation, an ad-hoc provisioning of INR1bn/month is being made. We believe the adverse impact of wage hike is likely to be offset by the price hike. In the near term, e-auction price is expected to remain elevated, thus resulting in a good cash accretion.

Outlook and valuation: A dividend play; maintain ‘BUY’

We see CIL as primarily a dividend play as free cash flow of INR100bn a year is likely to be utilised in returning cash to shareholders. Besides, the focus on enhancing volume to the non-regulated sector is likely to keep the profitability high. We maintain ‘BUY/SO’ with a TP of INR200/share at 9x FY23E EPS.

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