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e-auction recovery in sight, premiums to stay

Valuations remain attractive; dividend yield at 11%

* COAL’s 2QFY22 e-auction premiums have been disappointing. However, the management highlighted that the current premium is over 50% compared to the 15.3% reported in its 2QFY22 result. It has re-started e-auction to nonregulated sectors, which should result in improved profitability.

* The management expects the price hike to offset an increase in wages, given the current strong demand environment and high international coal prices.

* The stock trades at 3.4x/3x FY22E/FY23E EV/EBITDA, with an attractive dividend yield of 11%. We value the stock at 4x FY23E EV/EBITDA with a TP of INR200. We maintain our Buy rating, with a revised TP of INR200/share (from INR185 earlier). A surge in coal demand from the Power sector, which could squeeze supplies to non-regulated sectors through e-auctions, remains a key risk as it could hurt profitability.

Guidance for FY22 revised upwards after a demand recovery

* Its dispatch guidance for FY22 has been increased to 660-670mt compared to its previous guidance of ~640mt. This is in light of a recovery in demand, especially from the Power sector, driven by higher international coal prices, leading to higher demand from COAL.

* With a recovery in demand from the Power sector, supplies to non-regulated sectors have been squeezed. The same has now begun to recover as both production and dispatches have improved post monsoon.

* Our FY22 e-auction ASP at INR1650 is conservative, considering 2Q e-auction ASP of INR1,594/t (a 15.3% premium over FSA prices), while the current premium over FSA is ~50%. We see scope for an upward revision to our FY22 estimate, if current e-auction premiums sustain, provided volumes pick up.

Price hikes to offset wage cost push; liquidity remains strong

* COAL last raised prices in FY18. With wage negotiations underway, we expect COAL to immediately announce a price hike, which should cover the increased wage bill and leave room for a margin improvement.

* Receivables have improved significantly to INR120b from INR180b at the end of FY21, thus improving its liquidity position. COAL now carries a cash balance of ~INR300b.

* The stock is attractively available at 3.4x/3x FY22E/FY23E EV/EBITDA. While demand is likely to improve post monsoon, the second half of the fiscal is generally stronger compared to the first half for COAL. The strong dividend yield of ~11% supports the downside.

Key takeaways from the management interaction

* Capex for FY22 is pegged ~INR170b, of which COAL has so far spent INR70b. It is still sitting on a liquidity of ~INR300b.

* The company has fixed 7th Dec’21 as the record date for declaring dividend.

* COAL is likely to sell about 95mt in the e-auction (similar to FY21), provided demand from the Power sector is not as overwhelming as it was in Sep-Oct’21. Sales to the Power sector is at a 20% discount to the non-Power sector, so any significant uptick to the Power sector at the cost of sales to the non-Power sector dampens COAL’s profitability.

* The company is still working on a plan for achieving production capacity of 1b tonne. While it had planned to previously reach the target by FY23-end, the revised target now stands at FY24-end. This plan could be further delayed as first mile connectivity is the most challenging part in any mine’s evacuation plan.

* India imports about 70mt of thermal coal of a grade that can be replaced by COAL. This is equivalent to about 100mt for COAL. The management highlighted that it has been able to supply about 60-60mt.

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