Coal India rating – Hold: A good last quarter for the company

COAL’s Q4 Cash Ebitda increased 56% year-on-year and was 18% higher than JEFe, primarily due to better than expected FSA realization. Significant release of working capital generated strong cash flow in FY22. COAL’s revenue outlook improved, driven by recovery in volumes and higher e-auction prices . However, the increase in personnel costs due to the revision of workers’ salaries should constitute a headwind. Its PE 6x FY24e is reasonable, but the long-term outlook remains uncertain. We keep Hold with Rs 175 PT (previously Rs 160).

Good results in Q4: COAL’s fourth quarter shipment volumes increased 9% year-on-year while ASP increased 12% year-on-year. FSA (link) volumes were up 13% YoY and ASP 8% YoY (+6% YoY), possibly boosted by year-end incentives. Electronic auction volumes fell 4% year-on-year, but ASP rose 25% quarter-on-quarter amid high global coal prices. Reported Ebitda was up 42% year-on-year and was just under 2% below JEFe. Excluding non-cash stripping adjustment charges, cash Ebitda increased 56% year-over-year and was 18% higher than JEFe. Cash cost/t decreased by 1% year-on-year while Ebitda cash/t increased by 43% year-on-year. PAT was up 46% year-on-year and was 7% higher than JEFe, driven by higher financial earnings. COAL declared a final dividend of `3/sh, bringing the total dividend for FY22 to Rs 17/sh.

Improved revenue outlook: COAL shipment volumes increased 15% year-over-year in FY22 after a 6% decline in FY19-21; FY23 got off to a good start with 6% growth in April. We consider COAL shipment volumes increasing 5% CAGR in FY22-24E. A rise in bond coal prices could be on the horizon as the company typically raises prices close to wage reviews; we assume a 10% upside in Q2FY23. E-auction realizations are expected to remain strong given the sharp rise in global coal prices, although e-auction volumes are likely to remain constrained due to the diversion of coal into the power sector.

Raising wages to drive up costs: Wages for COAL workers are increased every five years and a review is scheduled from June 2021. COAL had said on the third quarter call that wage negotiations may not be concluded until the end of the year. 23. In the last two revisions, staff costs increased by 44% in fiscal years 2011-2013 and 2016-2018; we take into account a 41% increase compared to FY21-24. We expect EBITDA in cash/t to improve from Rs 430 in FY22 to Rs 491 in FY23, but then fall to Rs 441 in FY24.

Significant release of working capital in FY22: COAL’s net working capital deteriorated significantly from 16 days of sales in FY19 to 85 days in FY21 (FY16-20 average: 52 days), but improved to 33 days to the end of FY22. Receivables in particular increased from Rs 196 billion in FY21 (80 days) to Rs 114 billion (38 days) in FY22. Good Ebitda and significant release of working capital resulted in a sharp increase in FCF from negative Rs 12-20 billion in FY20-21 to +Rs 283 billion in FY22. Further release of working capital could be difficult, and we expect an FCF of Rs 45-46 billion for FY23-24E.

Keep Maintain: COAL trades at a reasonable P/E of 5.5x/6.3x FY23E/FY24E and offers a dividend yield of 10-11%, albeit partly funded by the balance sheet. The outlook for FY23 is good with EBITDA growth of 22%, but we then expect a decline of 7% for FY24. Long-term concerns about the ability to generate sustainable volume growth , the absence of a well-defined price increase policy, the increase in personnel costs and ESG remain. We are increasing FY23-24 EPS by 8-15% primarily reflecting higher e-auction realizations. We retain Hold with Rs 175 PT (previously Rs 160) at 6x FY24E PE.

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