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COAL’s Q4 cash Ebitda rose 56% y-o-y and was 18% above JEFe, mainly led by better-than-expected FSA realisation. A big working capital release drove strong cash flows in FY22. COAL’s top-line outlook has improved, led by pickup in volumes and rising e-auction prices. However, higher staff cost due to workers’ wage revision should pose a headwind. Its 6x FY24e PE is reasonable, but long-term outlook remains uncertain. We retain Hold with Rs 175 PT (earlier Rs 160).

Good Q4 results: COAL’s Q4 dispatch volumes grew 9% y-o-y while ASP rose 12% q-o-q. FSA (linkage) volumes were up 13% y-o-y and ASP rose 8% q-o-q (+6% y-o-y), possibly boosted by year-end incentives. E-auction volumes fell 4% y-o-y but ASP rose 25% q-o-q amid strong global coal prices. Reported Ebitda was up 42% y-o-y and was a slight below 2% below JEFe. Excluding non-cash stripping activity adjustment expense, cash Ebitda rose 56% y-o-y and was 18% above JEFe. Cash cost/t fell 1% y-o-y while cash Ebitda/t rose 43% y-o-y. PAT was up 46% y-o-y and was 7% above JEFe led by higher financial income. COAL has declared final dividend of `3/sh, taking the total dividend for FY22 to Rs 17/sh.

Improved top-line outlook: COAL’s dispatch volumes rose a strong 15% y-o-y in FY22 after a 6% decline over FY19-21; FY23 has started well with 6% growth in April. We factor in COAL’s dispatch volumes rising at 5% CAGR over FY22-24E. A price hike for linkage coal may be on the horizon, as the company usually raises prices close to wage revisions; we assume a 10% hike in Q2FY23. E-auction realisations should remain high given the sharp rally in global coal prices, although e-auction volumes will likely remain range-bound due to diversion of coal to the power sector.

Wage hike to push up costs: COAL’s worker wages are raised every five years, and a revision is due from June 2021. COAL had said in Q3 call that wage negotiations might conclude only by end-FY23. In the last two revisions, staff cost rose 44% over FY11-13 and FY16-18; we factor in 41% increase over FY21-24. We expect cash Ebitda/t to improve from Rs 430 in FY22 to Rs 491 in FY23 but then fall to Rs 441 in FY24.

Big working capital release in FY22: COAL’s net working capital worsened significantly from 16 days of sales in FY19 to 85 days in FY21 (FY16-20 average: 52 days), but has improved to 33 days at end-FY22. Receivables in particular have come down from Rs 196 bn in FY21 (80 days) to Rs 114 bn (38 days) in FY22. Good Ebitda and big working capital release have resulted in a sharp rise in FCF from negative Rs 12-20 bn in FY20-21 to +Rs 283 bn in FY22. Further working capital release might be tough, and we expect FCF of Rs 45-46 bn in FY23-24E.

Retain Hold: COAL trades at a reasonable 5.5x/6.3x FY23E/FY24E PE and offers 10-11% dividend yield, albeit partly funded by balance sheet. FY23 outlook is good with 22% Ebitda growth, but we then expect a 7% decline in FY24. Long-term concerns around capability to deliver sustainable volume growth, lack of well-defined price hike policy, rising staff cost and ESG remain. We raise FY23-24 EPS by 8-15% mainly factoring in higher e-auction realisations. We retain Hold with Rs 175 PT (earlier Rs 160) at 6x FY24E PE.

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Author: Howard Caldwell