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Analyst Corner: Maintain ‘buy’ on Coal India with target price of Rs 185

CIL’s Feb-21 operating performance was impacted by sluggish demand from the power sector.

Coal India (CIL) posted a 7% YoY decrease each in its Feb-21 production and offtake. Key points Larger subsidiaries MCL and SECL lagged. NCL is likely to be the only subsidiary to achieve the FY21 production target. Inventory piled up further to 76mt. That said, we expect CIL’s performance to improve on the back of, demand traction from the power sector; and higher e-auction volume/premium. On cash accretion, we expect receivables to reduce progressively. Given the company’s improving operating outlook, we are raising the target PE to 9x (from 7.5x), in line with its historical average. This lifts the TP to Rs 185 (up from Rs 156). Maintain ‘BUY’.

Performance dragged by lower power offtake. CIL’s Feb-21 operating performance was impacted by sluggish demand from the power sector. Key points, Production at 2.21mt/day (Feb-20: 2.29mt/day) and offtake rate at 1.83mt/day (Feb-20: 1.90mt/day). Offtake decline YoY at larger subsidiaries SECL and MCL was 7% and 4%, respectively, mainly due to the lack of a pickup in demand from the power sector. NCL continues to be a clear outperformer and on track to achieve its target of 113mt for FY21. Incremental supply for import substitution. Pithead inventory is almost at 75.7mt.

The worst may well be behind In our view, CIL’s performance is expected to improve on the back of a potential uptick in the power sector demand considering coal stocks at power plant are below 18 days; about 24% e-auction premium for Jan-21 on average compared with 8% for Q3FY21; endeavours to substitute imports, which are gathering pace; and iv) a potential reduction in receivable from Rs 247bn at end-Jan-21 as overdues to gencos have started receding (down 3%), particularly in the wake of the PFC/REC’s disbursement of tranche 1 of Rs 450bn (now completed). Besides, we expect dividend pay-out of Rs 12/share (similar to FY20), which is a big source of comfort amid issues with cash accretion in FY21.

Outlook and valuation. Good days in store; maintain ‘BUY’ CIL’s volume trajectory has wavered since Nov-20 mainly due to a high base and lacklustre demand from the power sector. Besides, e-auction premium crashed to single digit as the company reduced the floor for bidding.

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