Coal India Ltd

Q3FY23 consolidated operating profit of Rs. 10,389 crore (up 52% y-o-y; up 43% q-o-q) was 4% below our estimate of Rs. 10,819 crore due to 4% miss in blended EBITDA margin at Rs. 591/tonne (up 50.5% y-o-y; 25.4% q-o-q). Lower-than-expected EBITDA margins were owing to a 2% miss in blended realisations at Rs. 1,845/tonne, while contractual expenses were 27% higher-than-expected (rising 42% q-o-q). Coal offtake volumes of 176 million tonnes (up 14% q-o-q) was in line with provisional volume numbers and were driven by an 11%/41% q-o-q increase in FSA/e-Auction volumes to 158/15 million tonnes. FSA/E-auction realisation of Rs. 1,482/Rs. 5,047 per tonne, up 4.8%/down 16.8% q-o-q missed our estimate by 4%/5%. Consolidated PAT of Rs. 7,756 crore (up 70% y-o-y; up 28% q-o-q) was 3.6% below the estimate of Rs. 8,046 crore due to miss in margin, higher depreciation and tax rate partially offset by higher other income.

Key positives
* Company declared a second interim dividend of Rs. 5.25/share taking the total dividend to Rs. 20.25/ share in FY23 till date, which implies a dividend yield of 9% on CMP.

Key negatives
* Lower-than-expected FSA/E-auction realisation of Rs. 1,482/Rs. 5,047 per tonne (miss of 4%/5%)
* Contractual expenses were 27% higher-than-expected (up 21%/42% y-o-y/q-o-q).

Our Call
Valuation – Maintain Buy on CIL with an unchanged PT of Rs. 280: Strong earnings growth outlook (expect a 20% PAT CAGR over FY2022-FY2025E), high RoE of ~51%, and dividend yield of 12% make CIL’s valuation attractive at 5x/4.5x its FY2024E/FY2025E EPS (close to troughs). The board has given an in-principle approval to divest a 25% stake in Bharat Coking Coal Limited (BCCL) and awaits the government’s nod. A stake sale and a potential listing could help unlock value. We maintain a Buy recommendation on CIL with an unchanged price target (PT) of Rs. 280.

Key Risks
Lower-than-expected volume offtake amid any weakness in electricity demand and realisations (especially for e-auction) could affect margins and earnings outlook. The government’s divestment plan could act as an overhang on the stock.

Investment theme
The government’s plans to increase coal production to substitute imports (stands at more than 200 million tonne) would help CIL to register sustainable volume growth over the next couple of years. Moreover, cost-control initiatives such as reduction of manpower (employee cost accounts for 53-54% of overall cost) would cushion margins. Moreover, valuations are at a steep discount to historical averages and the stock offers high dividend yield.

Refer: COALINDIA for more details.