EXPECT DECENT GAINS IN COAL INDIA STOCK

Analysts see 15-20% upside in its share price

There’s been a lot of action in the power sector, especially in merchant power with power exchanges booking short-term units at higher rates. Greater power demand is a sign of ongoing recovery.

That must be backed up by adequate coal supplies since close to 70 per cent of power is from thermal units. The key coal supplier is Coal India (CIL), which along with its subsidiaries, has a near-monopoly, apart from captive mines awarded at auctions to units in the power and steel sectors.

Recent reports indicate 41 thermal units have less than seven days of coal stock (as of September 7), and the coal ministry has asked private sector organisations controlling captive mines to increase production. CIL is juggling its delivery schedules to prioritise delivery to power units with less than seven days’ supply.

CIL has ramped up production considerably when compared with last financial year. It delivered 206 million tonne (mt) to power units alone between April and August 2021 — 40 mt more than during the corresponding period last year.

The company has embarked on a huge capex exercise and has committed ~13,115 crore in 2020-21 despite the pandemic. Much of this is on improving “first-mile connectivity” with the induction of better mechanised conveyer and rail systems. This should sharply reduce transport costs.

In Q1FY22, CIL recorded consolidated sales of ~23,293 crore, with other operating income at ~1,988 crore, versus ~17,007 crore and ~1,479 crore, respectively, in Q1FY21. These results showed the second wave impact on the manpower-heavy operation, given that January-march 2021 had sales of ~24,510 crore, and other operational income of ~2,189 crore. The profit before tax was at ~4,335 crore, while PAT was at ~3,174 crore, versus ~2,800 crore and ~2,077 crore, respectively, in Q1FY21 and ~6,406 crore and ~4,589 crore in the previous quarter. Most of these numbers are yet to reach pre-pandemic levels of 2018-19, so there is upside here.

Receivables were at ~19,623 crore in FY21. There could be some political trouble with Jharkhand (which is ruled by a coalition led by the Jharkhand Mukti Morcha, a party opposed to the Bharatiya Janata Party) claiming that the company owes ~1.56 trillion to the state.

August 2021 was a good month with high offtake, reduction in dues from state discoms, and strong e-auction revenues. Domestic coal prices have just inched up compared to global prices, which have risen much more. But August e-auction price realisations were strong at ~1,6501,700 a tonne, which is around a 7-10 per cent increase YOY. Volumes sold at auction hit 18 mt — a five-year high. Dues from discoms reduced to ~18,000 crore by August, from a high of ~25,000 crore (February 2021). Inventory held fell 21 per cent YOY to 49 mt in August.

Annual sales should increase to around 521 mt in 2021-22 from a low of 479 mt in 2020-21, but lower than around 608 MT in 2018-19. Ebitda per tonne should be around ~219, marginally lower than ~221 (2020-21) but excess volume could compensate. Once better connectivity comes into play, Ebitda per tonne should rise to around ~275 in the next financial year and improve to over ~300 per in 2023-24, assuming price trends remain favourable. Free cash flows should more than double this financial year, as receivables reduce.

The stock has underperformed for years, with a 40 per cent drop in share price over the past five years. CIL has lost around 5 per cent in the past three months. The stock may have bottomed out, with analysts estimating a target return of around 15-20 per cent in the next 12 months.