Company update: Coal India (Outperformer) - Volume recovery some time away

Coal India Ltd’s (CIL) stock slid ~17% over last six months, pressured by declining volumes and continuous stake sale by government through ETFs. A consistent fall in the Maharatna’s H1FY20 volumes was due to strikes at some subsidiaries, heavy monsoon impacting output and evacuation due to disruption of roads, etc. Contrary to our earlier view of volume recovery October onwards, we now estimate ~20% decline even in October. As a result, we have cut our FY20E/FY21E EBITDA by 19%/10%, respectively, to factor in lower volumes; our target price too has been revised downwards to Rs246/sh (earlier Rs282), now valuing the stock at 5.0x FY21E EV/EBITDA. We reiterate our Outperformer rating on the stock.

• Volumes expected to decline yoy for the first time in a decade: Volume offtake fell 5.2% yoy to 276mt during H1FY20 and we estimate further ~20% yoy decline in October as well. We believe that it will be difficult for CIL to post 10% yoy volume growth during Nov-Mar to record flat overall volumes in FY20E. With rains subsiding, volumes should recover November onwards, with CIL likely recording ~6% yoy volume growth during Nov-Mar but still achieving ~1.7% yoy decline in FY20E at 598mt, first yoy decline in a decade. Similarly, our FY21E volume estimate too stands reduced by 4.6% to 634mt.
• Lower e-auction volumes to hurt profitability more: With fall in overall volume, we expect CIL’s e-auction volumes to decline by ~28% yoy to 50mt, given the company’s commitment to supply coal under FSA. We estimate CIL would earn ~Rs775/t more than FSA coal in FY20E, which would unfavourably impact its EBITDA on account of the adverse sales mix.
• EBITDA estimates cut by 19%/10% for FY20E/FY21E: We have cut our FY20E/FY21E ex-OBR EBITDA by 19%/10% yoy, respectively, factoring in lower volumes and adverse sales mix. However, CIL could benefit from lower tax rate (reduced from 35% to 26%), as a result of which, we estimate lower decline of 9%/1% to our FY20E/21E PAT estimate.

Reiterate Outperformer with reduced target price of Rs246

Though the volume decline in CIL could be temporary, it would nonetheless adversely impact FY20E profits. We expect CIL to revert to volume growth in FY21E (6% yoy to 634mt) on a lower base in FY20E (598mt). Our estimate of Rs20/sh of dividend for FY20E implies a dividend yield of ~10%. Any indication of the government halting share sale would have a positive bearing on the stock. We value CIL at 5.0x FY21E EV/EBITDA to arrive at our revised target price of Rs246/sh.