We attended Coal India’s (CIL’s) management call for business updates and improved clarity on the company’s volume and cash use aspects. Main takeaways: I Dividend payouts likely to remain limited in the near term; (ii) CIL is geared towards growing production when demand is revived; and (iii) import substitution remains a strategic imperative. In our view: I the reduction of missing volumes in Q1FY21 appears to be challenging; and (ii) the dividend may be limited to Rs 12 / share clouded by the possible settlement of tax disputes, inflated receivables and high capex rate.
That said, we still find the balance sheet fairly resilient with the probable post-tax generation of Rs 140 bn in FY21e. Maintain TP purchase of Rs 165 (exit multiple of 7.0x FY22e EPS).
Production woes over
CIL aims to increase production in line with the revival of demand. Key points: I Overload removal is underway, benches are being prepared and mine geometry modified to promote higher production; (ii) efforts are underway to replace imports – import replacement has already been auctioned at 18 mt; and (iii) cost-reduction steps are being taken for end-customers.
In addition , the company reduces production at its high-cost mines in order to rationalize fixed costs. In our opinion, FY21 is likely to be difficult, with volumes dropping to just ~535mt and Ebitda plunging 39% y-o – y to Rs145 bn.
Irony of times: Likely low dividend despite copious cash balance
In our view, the dividend payment of Rs 20 / share, close to FY14-17, seems highly unlikely to be as follows:
(i) Cash outflows may occur as CIL settles tax disputes (~Rs 80 bn) under the ‘Vivaad se Vishwas’ scheme;
(ii) inflates the receivables at Rs170 bn; and (iii) the capex target at Rs120 bn in FY21. We estimate the dividend payout of Rs12 / share (under investor expectations), but still imply a healthy return of ~9 per cent.
Despite concerns about possible cash outflows to settle tax disputes and near-term demand problems, we still like CIL because of its robust balance sheet and its attractive dividend yield of ~9%. With the TP of Rs 165, we maintain ‘BUY/SO.’ The stock is being traded at 5.8x FY22e EPS.
