Impressive performance sustains: Coal India (CIL) sustained its robust operating performance in Dec-21. Key points: i) Production rate improves to 1.94mt/day—similar to offtake. ii) Larger subsidiaries, particularly MCL, continue to improve. iii) Pit-head inventory declines further to 28.6mt—one of the lowest levels ever. Going ahead, we expect production to gather steam, particularly at larger subsidiaries, thereby alleviating coal shortage. We expect cash generation in Q3FY22 to improve on the back of i) higher offtake (up 18% QoQ); ii) better e-auction premium; and iii) working capital unlocking. Maintain ‘BUY’ on CIL with an unchanged TP of
210 on 9x FY23E EPS.
Another month of sound operating performance: CIL’s Dec-21 operating performance has improved further. Key points: i) Production rate caught up with sales for the first time in FY22. ii) Larger and more profitable subsidiaries showed a marked improvement in performance. iii) Inventory declined slightly in Dec-21 to 28.6mt. iv) E-auction volume, after falling in Oct-21, has been improving steadily—particularly to the non-regulated sector. Rake availability has continuously improved. After hitting a trough of 241.9 rakes/day, the rake movement improved to 272.2 rakes/day in Nov-21. Taking cues from the current offtake rate, we expect CIL’s FY22 offtake to rise 14% YoY to 650–655mt (our estimate: 643mt). Expect profitability and cash generation to improve: Despite a lacklustre performance in H1FY22, we expect H2FY22 to be much better for CIL led by higher e-auction premium and sales volume. We expect the e-auction premium at 50–55% in Q3FY22 compared with 14% for H1FY22. Similarly, we expect H2FY22 sales volume at 346mt, up 12.5% compared with H1FY22. On the working capital front, while receivables are expected to remain broadly unchanged compared to end-Sep-21, we expect lower inventory to lead to further working capital unlocking, in addition to 9,750 crore bn achieved in H1FY22.
Outlook and valuation: Improvement in store; maintain ‘BUY’: Taking cues from production/offtake rates, we believe H2FY22 is likely to be much better for CIL. Furthermore, the higher e-auction premium achieved in Oct-Nov-21 and focus on the non-regulated sector in Dec-21 is likely to improve profitability.
On the working capital front, we still do not see an inventory build-up. If the current offtake continues, we expect inventory to reduce to much lower levels by Mar-22 than 96.6mt in Mar-21.