Key takeaways from Coal India (CIL’s) Q4FY21 conference call: 1) Although demand was impacted between March and May 21, YTDFY21 production and picks were robust due to replenishment, 2) Target FY22 levy is now 660 mnte, which is achievable, 3) capital expenditure will remain at 150 billion rupees each in fiscal years 22 and 23, mainly for equipment replacement, land acquisition and evacuation plans; From FY24 onwards, investments will depend on demand for coal and will primarily be for land acquisition and mining development, 4) CIL is working to further reduce receivables from Rs 170 billion to Rs 120-130 billion of Rs, 5) The electronic auction volume target for FY 22 is 130-140mn; bonuses can improve to levels of 20-25%, 6) it will award eight to ten additional mines via the MDO path in FY 22, which will help keep costs down, 7) negotiations on the salary review are underway; the impact will be only 2-3%, and 8) the merger of electronic auctions will bring greater transparency and efficiency while reducing costs. Maintain “buy”.
Demand and workforce have been impacted due to the second wave of Covid and lockdowns. Demand suddenly declined on March 21, as power plants had high inventories and limited drawdowns. Up to June 21 YTD, shipments and production have been strong.
Withdrawal target: CIL has lowered its withdrawal target for fiscal year 22 to 660 mnte, depending on factors such as electricity demand, disruptions related to covid, import substitution, etc.
YTDFY22, CIL exceeded last year’s levy by 36mnte. Thus, if CIL ends H1FY22 with sample volumes greater than 45 to 50 minutes year-on-year, 660 minutes will be achievable. The reduction in the workforce during fiscal year 22E is targeted from 13,000 to 14,000 years. If it had not been for wage negotiations, the reduction would have reduced the wage cost by 3% year-on-year. Even an increase of 5 to 7% in salaries may have an impact on salary expenditure of only 2 to 3% on expenditure for fiscal year 21. Tips increased by Rs 10 billion in Q4FY21, which has resulted in a 14% increase in salary costs.
Price increase: CIL is considering a price increase and will make a decision shortly. Valuation Methodology and Risks: We maintain the buy rating and target price of Rs 234 on CIL with drawdown estimates of 630mnte / 660mnte for FY22E / FY23E. We evaluate CIL on the basis of DCF with a maximum output of 850mnte FY29E onwards.
The stock is currently trading at 5.1x P / E and 2.7x EV / EBITDA on a FY23E basis with 39% RoE.
Capex: Negligible expenditure in diversification projects. There will be capital expenditure on the 100 MW GUVNL solar project, on a 70:30 D: E basis, where the total equity requirement will be Rs5bn in case CIL gains 100-300 MW more in the during the year. Land acquisition, R&R, FMC projects for coal removal and railway lines and branch lines will account for the bulk of the capital expenditure.