Maintain ‘buy’ on Coal India with fair value of Rs 195

By: |
September 8, 2020 9:35 AM

Improvement in eauction premiums as well as a more healthy 9.6% yoy growth in dispatches in August 2020, lend hope for an improved earnings profile from hereon.

Coal India, Coal India fair value, Aluminum prices, US dollar, Covid-19, global economyReversal of the overburden provision of Rs 2.5 bn salvaged earnings to some extent resulting in Ebitda decline of 68% yoy to Rs 15.7 bn.

Weak on expected lines. Coal India reported weak earnings in Q1FY21 on the back of 21% yoy decline in volumes, and aggravated by 6.7% yoy decline in blended realisations. Reversal of the overburden provision of Rs 2.5 bn salvaged earnings to some extent resulting in Ebitda decline of 68% yoy to Rs 15.7 bn. Improvement in eauction premiums as well as a more healthy 9.6% yoy growth in dispatches in August 2020, lend hope for an improved earnings profile from hereon. Maintain BUY with revised fair value of Rs 195/share (from Rs 215/share earlier).

Net sales at Rs 13.8 bn declined 34% yoy (KIE: Rs 19.2 bn) due to lower commodity prices (aluminum: -16% yoy; alumina: -33% yoy). Covid-19 impacted volumes at both aluminum and alumina divisions. Ebitda at Rs 1.3 bn declined 40% yoy (KIE: Rs 284 mn) due to high operating leverage partly offset by inventory build-up of Rs 4.4 mn. Net income of Rs 166 mn was down 83% yoy and 84% qoq on lower other income.

Segmental performance. Alumina witnessed 12% yoy lower volumes; however, Ebitda at Rs 916 mn (US$55/ton, -33% qoq) declined 53% yoy mainly led by 24% yoy lower alumina realisation. We estimate aluminum sales volumes of 0.07 mn tons, down 31% yoy due to Covid-19 versus production of 0.1 mn tons leading to a sharp inventory build-up. Ebitda of Rs 374 mn (+US$69/ton versus a US$40/ton loss in 4QFY20) was led by 16% yoy lower realisation and offset by 19% yoy lower costs (coal and carbon) and inventory build-up.

We see both alumina and aluminum markets in significant surplus and downside risks to recent liquidity-led price buoyancy. Aluminum prices have rallied by 20% YTD FY2021E led by recovery in the global economy, resilient Chinese demand, and a weaker US dollar.

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