FY21/22e Ebitda down 25/4% given slump in power demand; CIL’s cash position a positive; ‘Buy’ retained with TP of Rs 202.
Coal India’s (COAL’s) dispatches fell by10.3% y-o-y to 53.5mt in Mar’20 due to a sharp fall in demand from the power sector. On the other hand, production was up 6.5% y-o-y at 84.4mt led by growth in its key subs (SECL: +22%; MCL+6%). For FY20, dispatches were down 4% y-o-y at 582mt, while production declined by ~1% y-o-y to 602mt.
Lower power demand to impact dispatches amid inventory buildup
India’s nation-wide lockdown comes at a time when (i) power demand has largely remained muted (11MFY20: 1.5% y-o-y ) and (ii) production at COAL’s mines has been ramped up following a heavy monsoon season. Accordingly, inventories at both coal mines and power plants have risen – a general trend at the onset of summer, but higher than usual.
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On the other hand, with Industrial and Commercial consumers accounting for nearly ~50% of power demand, generation has been severely dented. A look at March 22–30 data indicates demand fell by ~21% v/s daily 3-year averages (2017–19). In contrast, for the first 21 days in March, demand was up 2.5%. Following the lockdown (March 25th–30th), the fall was steeper at ~25%.
Furthermore, given the must-run status for renewables, the brunt of the demand decline is being borne by coal-based plants whose generation fell by ~40% y-o-y over March 25th–30th.
On account of such a sharp demand drop and higher coal inventories at power plants, we build in lower dispatches for COAL in FY21 (-5.5% y-o-y v/s earlier: +6.5% y-o-y). While we also anticipate a decline in coal imports, a subsequent fall in global coal prices may pose a risk and eventually impact COAL’s e-auction realisations.
Foresee near-term headwinds
A large proportion of COAL’s cost is fixed, with employee cost accounting for ~50% of expenses. Moreover, we expect the company to focus on OBR-removal activities and continue to utilise contractual employees. Thus, with lower dispatches, negative operating leverage is likely to kick in. Working capital could also be stretched with elevated receivables. Furthermore, we do not expect production to fully mirror the nosedive in demand in the near term. As a result, inventories could pile up in the interim.
We cut our FY21/22 adj. Ebitda estimate by 24/5%. However, we expect COAL to tide over the situation in the near term, given its large cash position (net cash: ~Rs 300 bn). We value the stock on 3.5x Sep’21e EV/Ebitda (v/s 4.5x FY21e EV/Ebitda earlier), given the uncertainty surrounding demand recovery, implying a target price of Rs 202/sh. The stock trades attractively at ~2x FY22e EV/adj. Ebitda (v/s historical average of 7x), P/E of 5x (v/s average of ~13x), and offers a dividend yield of ~8%. Maintain Buy.