Decent gains ahead in Coal India stock as power demand picks up

With business conditions improving, analysts expect 15-20% upside in share price of India's largest coal miner

There’s been a lot of action in the power sector, especially in merchant power with the 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 7 days of coal stock (as of Sep 7), and the 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 7 days supply.

CIL has ramped up production considerably compared to last fiscal. It has delivered 206 million metric tonnes (MT) to power units alone, between April-August 2021. This is 40 MT more than during April-Aug 2020.

The company has embarked on a huge capex exercise, which committed Rs 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 will sharply reduce transport costs.

In Q1, 2021-22, CIL recorded consolidated sales of Rs 23,293 crore, with other operating income of Rs 1,988 crore, versus Rs 17,007 crore and Rs 1,479 crore respectively in Q1, 2020-21 (YoY).

These results showed the second wave impact on the manpower-heavy operation, given that Jan-Mar 2021 had sales of Rs 24,510 crore, and other operational income of Rs 2,189 crore. Profits before tax were at Rs 4,335 crore, while PAT was at Rs 3,174 crore, versus Rs 2,800 crore and Rs 2,077 crore (YoY) and Rs 6,406 crore and Rs 4,589 crore (QoQ). Most of these numbers are yet to reach pre-pandemic levels of 2018-19, so there is upside here.

Receivables were at Rs 19,623 crore in FY 2020-21. There could be some political trouble with Jharkhand state (which is ruled by the JMM, a party opposed to the BJP) claiming that the company owes Rs 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 inched up compared to global prices, which have moved up much more. But August e-auction price realisations were strong at Rs 1,650-1,700/tonne, which is around 7-10 per cent increase YoY. Volumes sold at auction hit 18 MT, which is a five-year high. Dues from discoms reduced to Rs 18,000 crore by August, from a high of Rs 25,000 crore (Feb 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 would be around Rs 219, marginally lower than Rs 221 (2020-21) but excess volume will compensate. Once better connectivity comes into play, EBITDA per tonne should rise to around Rs 275 next fiscal and improve to over Rs 300 per in 2023-24, assuming price trends remain favourable. Free cash flows should more than double this fiscal, as receivables reduce.

The stock has underperformed for years, with 40 per cent drop in share price over the past five years. CIL has lost around 5 per cent in the last 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.