Coal India Ltd – Yielding dividends

Coal India Limited (CIL) is one of the largest coal producers globally producing 596 MT in FY21. CIL has 345 mines (as on 1^st April 2021) of which 151 are underground, 172 open cast and 22 mixed mines. CIL has extensive mining capabilities. It has advanced technology in open cast mining.

India continues to depend on coal for ~70% of its electricity requirement, with coal based generation forming 55% of the country’s installed capacity. Despite the increased focus on renewables, coal would continue to dominate India’s electricity production.

The onset of COVID-19 in India had come at a time when inventory at CIL’s mines and at power plants were already at high levels. This, coupled with the must-run status of renewables, meant demand for coal bore the brunt of weakened activity. This, in turn, lead to a sharp decline in e-auction realizations. With a recovery in demand, e-auction premiums and realizations have improved significantly. CIL’s e-auction bookings logged a robust 42% growth Y-O-Y during the April-August period, on the back of a demand spike in coal-based power generation and soaring international coal prices. Higher e-auction bookings translate to higher off take with a lag of a few months.

CIL reported a 33% Y-o-Y increase in offtake for 1QFY22. With improving offtake and realizations, we see operating leverage coming into play in FY22/23. A large proportion of CIL’s costs are fixed in nature, with employee cost accounting for ~55% of total expenses.

Newcastle thermal coal, Asia’s benchmark, has more than doubled this year to about $180/mt and Goldman Sachs Group Inc. expects it will average $190 from October to December 2021.   With a spurt in international coal prices there has been an increase in domestic demand as consumers switch to domestic coal. CIL has stepped up supplies to the power sector in September, clocking around 20% growth at an average of 1.39 MT/day. Power plants across the country facing coal shortages due to increased demand.

Coal is the most polluting fossil fuel and most global asset managers led by Blackrock are exiting their global fossil fuel holdings. This we believe can act as an overhang for CIL stock price. We believe that CIL can play a role of hybrid asset (equity+fixed income) and is suitable for moderately risk taking investors.

CIL has cash holdings ~Rs.17,300 cr currently which should be further aided by bumper profitability & we expect dividend payout of ~Rs.20/sh this year (12% yields at CMP). 

CIL is in a sweet spot with demand traction from the power sector, higher e-auction volume/premium and a spurt in coal prices globally. Last year the Company paid Rs.16/sh dividend & we expected it be higher going ahead due to improved profitability. This translates to a dividend yield in double digits. With bank interest rates around 6%, just dividend yields are a strong investment rationale.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 14 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.