Edelweiss remains positive on the stock’s prospects as the drivers of sustainable dividend yield of 9% are in place. Edelweiss maintains ‘BUY/SO’ with target price of Rs 186 on 9x Q2FY23E EPS.
Edelweiss says Coal India’s receivables have declined 17% (from the Feb 2021 peak) to Rs 208 bn in April 2021. Given the traction in power sector volume, up 34.2% YoY in Apr 2021, Edelweiss expects receivables to reduce further.

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Besides, Edelweiss expects working capital unlocking from dip in inventory as well. Furthermore, the focus on e-auction volume, though at a lower premium of 18-20%, is likely to improve cash accretion. Hence, Edelweiss expects cash accretion in Coal India in Q1FY22 for the first time after Q2FY19. In Edelweiss view, this increases the prospects of high dividend besides meeting the capex commitment.

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Coal India’s May 2021 shipments rose 38% YoY to 55.1mt.

Key points:

1)      Production rationalised owing to significant pithead inventory
2)      Offtake at 55.1mt was the highest ever in May
3)      Lower base led to significant growth in smaller subsidiaries
4)      Evident drawdown of pithead stock

Taking cognizance of 2MFY22 performance, we see first signs of uptick in demand from the power sector. Besides, Edelweiss expects e-auction volume/premium to get a leg up from higher imports by China. Edelweiss maintains ‘BUY’ with a target price of Rs 186 on 9x Q2FY23E EPS. Edelweiss recommendation is also based on dividend yield of 9%.

Coal India’s May 2021 volume uptick of 38% YoY was partially due to lower base. That said, May volume at 55.1mt was the highest ever for the corresponding month.

Going ahead, Edelweiss expects Coal India’s FY22E offtake at 604mt (up 5% YoY). Edelweiss expects the offtake growth to normalise once the base effect wanes in Q2FY22.

Besides robust operating performance in May, partially led by low base, Edelweiss sees working capital unlocking as a significant value driver for Coal India. In Edelweiss' view, international coal prices might firm up owing to higher Chinese imports. This would enable Coal India to increase its e-auction volume from the import substitution category as well as sustain the e-auction premium at 20-25% over FSA.