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E-Auction realisations + FSA volumes raise profits

Coal India (CIL) reported PAT (Ex OBR) at INR 101bn (+76% YoY / +25% beat on JMFe) led by a) E-auction realisations rising +38% YoY with peak imported coal prices of $200-290/T Mar-April’22 and b) 40% YoY rise in other income. We anticipate the benefit of higher international coal prices in April’22 ($250-280/T) to benefit e-auction deliveries in 1Q FY22 (2-3 month lag between auction and deliveries). However as global coal indices have corrected to $150/T in May’22 this benefit may taper off beyond 1Q FY22. CIL registered 15.5% off-take growth in FY22 and targets 12% growth (c.700MT) in FY23. While employee costs are have grown 5% YoY in FY22, the upcoming negotiations on wage hike can impact FY23 – unless offset by a hike in FSA prices (under deliberation). Company declared final dividend of INR 3/share taking FY22 total dividend to INR 17/share, implied yield of 9.4%.

JM View - We remain positive on CIL, given 9.4% dividend yield with near term triggers of rising e-auction realisations and power demand driven off take growth in FY23. We estimate 12% earnings CAGR (FY21-24), which factors a) 7% volume growth in FY23/34.b) elevated near term e-auction prices and c) benefit of operating leverage on rising sales with stable costs (not factoring wage hike risk). Incremental power demand growth in FY23-24 can lead to higher than assumed (7%) volume growth. With soaring international coal prices we find near term strength in e-auction realisations led earnings growth in FY23. We estimate every INR 100/T rise in e-auction prices raising FY23 PAT by 4-4.5%. However the next round of wage hikes (under discussions), can pose a risk to FY23-24 earnings, unless offset by a commensurate FSA price hike. Our DCF based TP of INR 210 assumes 0% FCFE growth for FY25-40, and business closure by FY40. We find CIL inexpensive at 6x P/E for FY24 and Maintain BUY (TP INR 210).

Better than expected E-auction realisations led to earnings beat: CIL reported Adj PAT (Ex OBR) at INR 101bn beating JMFe by 25% largely led by +38% YoY growth on E-auction realisation. PAT (ex-OBR) for the quarter grew by 75.5% YoY led by a) higher volume off take (+9% YoY) led by 19% YoY growth in FSA volumes while E-auction volumes fell 4% YoY b) higher blended realisations (+11% YoY) largely led by growth in E-auction premiums at INR 2,434/T in-line with surge in international coal prices, c) 24% YoY fall in finance cost. Receivables position improved to INR 113bn as of Mar’22 (vs. peak of INR 196bn in Mar’21) resulting cash levels jumping to INR 291bn (vs. INR 126bn in Mar’21)

Other highlights: a) Wage negotiations: CIL management has multiple rounds of meeting on wage negotiations, with initial demands by employee union of a 50% hike (vs. 20% in FY18). b) Price hike: CIL is in discussion with concerned authorities for a price hike in its linkage coal to offset increase in costs c) Capex: Company has guided for a capex of INR 170bn in FY23, d) Man power rationalisation / mine closure: CIL targets savings of INR 5bn from closure of unviable mines and ~INR 39bn with improvement in last mile connectivity. It has identified 158 underground mines employing 43% of labour but contribute only 5% of production. e) Cash balance: CIL has a cash balance of ~INR 291bn as on Mar’22.

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