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Value through cash accretion

Coal India (CIL) missed consensus Q2FY22 forecasts. Key points: i) Blended realisation was impacted by higher sales to the power sector. ii) E-auction premium over FSA at 15% was lower than our estimate. iii) Cost impacted by higher diesel price. iv) Good cash accretion due to working capital unlocking. v) H1FY22 capex at INR44.1bn

Going ahead, we see several levers of stock performance: i) Higher eauction premium. ii) Possible hike in FSA price. iii) Lower-thanexpected wage hike. Owing to significant cash accretion, we expect a dividend yield of 12–13% over the next two years. Maintain ‘BUY’ on the stock with a TP of INR210 at an unchanged 9x FY23E EPS.

Lower realisation results in earnings miss

CIL’s Q2FY22 EBITDA of INR39.1bn (down 2% QoQ) missed estimates. Key points: i) Higher sales to the power sector (up 13% YoY) resulted in lower realisation despite average grade remaining unchanged at G-11. ii) E-auction premium to FSA sales was at 15% (Q1FY22: 13%). iii) Contractual expense was up 9.6% YoY at INR271/t, mainly due to higher diesel cost. iv) Overburden removal was at 271.03m3 . v) Wage hike provisioning of INR3bn in Q2FY22. vi) Significant cash accretion due to working capital unlocking resulting in cash balance of INR283bn. Going ahead, management expects: i) FY22 sales volume at 670–680mt; ii) e-auction volume flat YoY at ~94mt but at higher premium; and iii) wage hike to be lower than last time as one-time gratuity adjustment (accounting for 20-25% of the hike last time) is unlikely to be there.

Robust dividend yield likely

On analyst call, management indicated dividend is more tax efficient than buyback in their case. Cash balance was INR283bn (INR46/share) at Sep-21 end, and we expect earnings momentum to be higher in H2FY22 due to better e-auction premium (40–45%) and sales volume growth. Besides, an earnings-accretive FSA price hike (net of wage escalation) is likely to be a positive. Hence, we expect dividend at INR18/share (FY21: INR16/share), implying an FY22E dividend yield of 12.6%.

Outlook and valuation: A formidable dividend play; retain ‘BUY’

Despite Q2FY22 results missing estimates, we are positive on CIL due to higher-thanexpected volume growth and e-auction premium prospects. Besides, cash accretion is likely to improve further tracking lower receivables, leading to a potential dividend yield of 12-13%. Retain ‘BUY’ with an unchanged TP of INR210 on 9x FY23E EPS.

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