Lower offtake hit Q3 performance
Offtake is likely to rise as production has ramped up post monsoon; valuations are attractive; ‘Buy’ retained
Coal India’s (COAL’s) results highlight the impact of lower volume offtake amid subdued thermal power demand. FSA realisations though were higher y-o-y on account of increased share to non-power and better grade. Production at the company’s mines has started to ramp up post heavy monsoon, and we expect offtake to improve as power demand recovers. The stock trades attractively at ~3x FY21e EV/adj. Ebitda and offers a dividend yield of ~10%. Maintain Buy with a target price of Rs 258/sh.
Ebitda declines as offtake decreases 8% y-o-y: COAL’s Q3FY20 adj. Ebitda (ex-OBR) declined 22% y-o-y to ~Rs 62 bn (our estimate: ~Rs 57 bn) due to lower offtake. The beat on our estimates was driven by better-than-expected realisations. Other income rose 21% y-o-y to Rs 14.1 bn. PBT fell 24% y-o-y to Rs 53.3 bn. Adj. PAT declined 14% y-o-y to Rs 39.2 bn (our est.: Rs 33.7 bn) given lower tax rate.
- Revenue declined 7% y-o-y to ~Rs 232 bn (our estimate: Rs 225 bn) due to a decline in sales volumes. Volumes were down 8% y-o-y to ~142mt (in-line).
- FSA volumes declined 6% y-o-y to 127.7mt. However, realisation was up 6% y-o-y to Rs 1,411/t.
- E-auction volumes declined 33% y-o-y to 9.8mt. Realisations, too, were down 8% y-o-y to Rs 2,623/t.
- Cash cost (ex-OBR) increased 8% y-o-y to Rs 1,086/t as a result of lower dispatches. The wage bill was up 3% y-o-y to Rs 98.4 bn.
Production ramping up post monsoon: COAL’s key subsidiaries such as SECL and MCL had witnessed production issues during the first eight months of FY20. These issues though have started receding. According to the company, production at Dipka mine has ramped up. Overall, daily production has increased to 2.0mtpd in Dec’19 from 1.3mtpd in Oct’19.
Valuations attractive; maintain Buy: While questions have been raised over the sustainability of thermal coal in India, we believe that coal would continue to dominate India’s electricity generation. Over the medium term, we expect volumes to continue growing for COAL at ~5%. Despite the high base of FY19, ongoing efficiency measures, along with volume growth, should drive ~3% adj. Ebitda CAGR over FY19-22. The stock trades attractively at ~3x FY21e EV/adj. Ebitda (v/s historical average of 7-8x), P/E of 7x (v/s average of ~13x). We value the stock on 4.5x FY21e EV/Ebitda at Rs 258/sh. Government divestment though could continue to be an overhang on the stock.