Multiple tailwinds emerge for Coal India after a strong Q3 despite hurdles

Increase in production, higher prices, better margins and high dividend yield are key positives

Coal India delivered a strong performance in Q3, 2021-22 despite facing hurdles such as heavy rainfall and the pandemic which affected physical performance. Coal prices are ruling very high globally, and this effect showed up in e-auctions, where prices were at 100 per cent premium to the agreed Fuel Supply Agreements (FSA).

The miner managed to produce 163 million tonnes (MT) in Q3, and sold 173 MT, which is higher YoY than 156 MT production and 154 MT sales. The company is considering a hike of about 4 per cent in the FSA rates as of now.

In financial terms, revenue rose 20 per cent YoY and 22 per cent QoQ to Rs 28,400 crore. The consolidated unadjusted operating profit at Rs 6,825 crore (up 32 per cent YoY) was mainly due to higher e-auction realisation of Rs 1,947 per tonne (up 33 per cent YoY; up 22 per cent QoQ).

The adjusted EBITDA (excluding overburden removal; OBR) grew 26 per cent YoY and 84 per cent QoQ to Rs 7,390 crore. There was a 17 per cent rise in FSA offtake, reflecting higher power consumption – as a result, the company could not fully capitalise on e-auction demand and supplied 5 per cent less in e-auctions at 26 MT.

The PAT grew 48 per cent YoY and 55 per cent QoQ to Rs 4,560 crore with a lower tax incidence. The receivables stood at a high Rs 13,000 crore (Jan 31, 2022) and the company hopes to reduce it by end-fiscal. The dividend yield is attractive at Rs 14 per share in interim dividends so far.   

The company is in the middle of wage negotiations, which would be a critical component to judging future Employee Expenses. Since June 2021, it has made a provision of Rs 100 crore per month towards wage increases – this may not be adequate and management may need to increase provisioning.

The Capex for 2021-22 is estimated at Rs 15,500-16,000 crore, and about Rs 10,000 crore has been spent. The Capex next fiscal will be about Rs 17,000 crore including various projects, such as first-mile connectivity, land acquisition, doubling of existing railway lines to improve dispatches, buying mining equipment, etc. The company is also investing in joint ventures in the aluminium sector, in fertiliser, and solar.

The company’s margins expand sharply in non-FSA offtake as reflected in e-auction. Given very high global prices, there is more demand and the company could continue to reap the benefits of being considerably cheaper than imports and spot prices should remain strong. Coal India targets 110-115 MT in e-auctions in 2021-22 with total production of around 640-660 MT this fiscal and around 700 MT in the next fiscal.

According to one sensitivity analysis, if wages increase by 15 per cent, assuming normal attrition and current levels of e-auction offtake and realisations, the FSA price will have to be hiked by 5 per cent to offset the increase in wage costs. The company currently has 2.5 lakh employees but hopes that natural attrition will lead to a reduction to a strength of 1 lakh over the next 10 years.

The stock market response has been positive. Most analysts have 'buy' / 'accumulate' advisories on the stock, with a 'reduce' recommendation from some analysts. Target prices range from Rs 165 (a drop from current price) to Rs 217 which is about 30 per cent upside. The high dividend puts a floor on the stock price.