Dividend payout likely to be constrained in near term; while FY21 will be challenging, ‘Buy’ retained given robust balance sheet.
We attended Coal India’s (CIL’s) management call on business update and got better clarity on the volume ramp-up and cash utilisation aspects of the company. Key takeaways: (i) Dividend payout likely to remain constrained in the near term; (ii) CIL is gearing up to ramp up production when demand revives; and (iii) import substitution remains a strategic imperative. In our view: (i) Recouping lost volumes in Q1FY21 looks challenging; and (ii) dividend may be restricted to Rs 12/share clouded by possible outgo on settlement of tax disputes, inflated receivables & high capex intensity.
That said, we still find balance sheet sufficiently robust with likely cash generation (post tax) of Rs 140 bn in FY21e. Maintain Buy with TP of Rs 165 (exit multiple of 7.0x FY22e EPS).
Production woes over
CIL is geared to ramp up production in sync with demand revival. Key points: (i) Overburden removal is in progress, benches are being prepared & mine geometry aligned to facilitate higher production; (ii) efforts are underway to substitute imports—already 18 mt has been auctioned against import substitution; and (iii) measures for reducing cost for end-customers are being taken.
Besides, the company is reducing production at its high-cost mines in order to rationalise the fixed cost. In our view, FY21 is likely to be challenging with volumes dropping to mere ~535mt and Ebitda plunging 39% y-o-y to Rs145 bn.
Irony of times: Likely low dividend despite copious cash balance
In our view, dividend payout of Rs 20/share, akin to FY14-17, seems highly unlikely as:
(i) There might be cash outgo as CIL settles tax dispute (~Rs 80 bn) under ‘Vivaad se Vishwas’ scheme;
(ii) inflates receivables at Rs170 bn; and (iii) capex target of Rs 120 bn in FY21. We estimate dividend payout of Rs12/share (below expectation of investors), but still implying a healthy yield of ~9% . Outlook: Robust balance sheet
Despite concerns on possible cash outgo to settle tax disputes and near-term demand woes, we still like CIL owing to robust balance sheet and an attractive dividend yield of ~9%. We maintain ‘BUY/SO’ with TP of Rs 165. The stock is trading at 5.8x FY22e EPS.