Moderate valuation, high dividends should provide floor to Coal India stock

Global slowdown leading to lower prices, fall in e-auction volumes and higher-than-expected wages are downside risks

Public sector major Coal India’s results disappointed the markets. At the consolidated levels, the profit after tax (PAT) for the second quarter of financial year 2021-22 (Q2FY22) was Rs 2,937 crore, down marginally from Rs 2,948 crore in Q2FY21. Revenue from operations increased to Rs 23,291 crore, compared with Rs 21,153 crore last year. Expenses also rose to Rs 20,424.5 crore, against Rs 18,177.8 crore in Q2FY21.

The Ebitda (earnings before interest, taxes, depreciation, and amortisation) for Q2 was Rs 4,441 crore, versus Rs 4,643 crore a year ago. Ebitda margin dropped to 21 per cent from 24 per cent last year. Importantly, receivables dropped to Rs 14,902 crore, versus Rs 19,623 crore last year, and further to Rs 12,000 crore by November.

Coal production in Q2 was 125.83 million tonnes (MT), compared with 114.98 MT last year. Offtake rose to 147.4 MT, against 134.3 MT a year ago. This was mainly due to higher power demand. Sales from e-auction was Rs 4,304.3 crore, with realisation of Rs 1,593.4 per tonne, a premium of about 15-16 per cent over FSA (fuel supply agreement) realisations of Rs 1,382 per tonne. The FSA realisation was Rs 1,394 per tonne in Q1.

For the half-year (H1), sales was 302 MT, versus 249 MT last year. The per tonne blended realisations were Rs 1,424 (FSA and E-auction combined) versus Rs 1,404 a year ago. 

The company intends to invest Rs 1.2 trillion by FY24 to achieve 1,000 MT output with over 500 projects on the anvil. It has cash-balances of Rs 30,000 crore, and intends to spend Rs 17,000 crore in capex in FY22 (about Rs 7,000 crore already spent in H1). The output target has been postponed by a year from FY23.

The drop in Ebitda and flat PAT were both disappointing. But in its guidance, the company said e-auction realisations have risen in October and November and are over 50 per cent higher than FSA. Its dispatch guidance for FY22 was upgraded to 660-670 MT from 640 MT. This was due to demand recovery, mainly from the power sector.

However, the downside risks are wage negotiations that could result in higher employee-related expenses; likely fall in global coal prices if there is a slowdown in global growth due to the fresh wave of Covid-19.

Another key risk is higher demand from FSA consumers in the power sector. This may leave Coal India unable to satisfy e-auction demand from non-regulated customers, leading to lower blended realisations. The premium in e-auctions should translate into higher blended realisations through H2, but e-auctions volumes may be less.

The stock has fallen about 6.5 per cent in 10 sessions. It has a commitment to handing out free cash flow post-capex as dividends, which is driven by the Government of India’s need for higher payout. The dividend yield is over 11 per cent at current market price. The moderate valuations, and more or less guaranteed dividend payouts should put a floor on the price. At least two brokerages have ‘buy’ recommendations with target prices of Rs 200-plus.