Reviews

In this edition, we have reviewed Coal India Ltd. and Varun Beverages Ltd. We suggest our reader-investors to HOLD Coal India Ltd. and Varun Beverages Ltd

We had recommended Coal India Ltd. in Volume 36, Issue No. 24 dated October 25 to November 7, 2021 under the ‘Analysis’ segment. The recommended price for the stock was ₹184. We had recommended the stock on the basis of the company being a market leader, strong financial credentials and strong capabilities for exploration. The state-owned Coal India Limited (CIL) was established in November 1975. CIL is the world’s largest coal producer and one of the greatest corporate employers, employing 2.5 lakh people.

CIL has 85 mining areas in eight Indian states through its subsidiaries. It is a Maharatna organisation. CIL is looking into the possibility of putting up a coal-to-methanol plant at Dankuni Coal Complex as a stand-alone venture in the coal-to-chemicals sector as part of its endeavour to promote clean coal technology and other uses of coal (DCC). The company’s quarterly consolidated financials reveal that net sales increased by 19.73 per cent in Q3FY22 to ₹25,990.97 crore as compared to ₹21,708.27 crore in Q3FY21.

The operating profit climbed to ₹7,478.33 crore in Q3FY22 from ₹5,813.37 crore in Q3FY21 i.e. a staggering 28.64 per cent rise. Similarly, the net profit skyrocketed to ₹4,559.74 crore in Q3FY22 from ₹3,083.95 in Q3FY21, gaining 47.85 per cent. Looking at the annual performance, the figures show a different picture. The net sales show negative returns of 7.46 per cent in FY21 of ₹82,710.32 crore as compared to ₹89,373.34 crore in FY20. The operating profit dropped by 20.2 per cent to ₹22,365.82 crore in FY21 as compared to ₹28,026.25 in FY20.

Subsequently, the annual net profit showed a fall of 23.93 per cent in FY21, slipping to ₹12,705.14 crore as opposed to ₹16,701.51 crore in FY20. It is currently trading at 2.9 times its original price and is predicted to provide 12 per cent dividend yield for both FY23 and FY24 at the CMP. Coal prices are anticipated to continue high for the next 12-24 months as Europe transitions away from Russian NG and toward renewables.

Along with the ongoing supply shortfall in the global coal market, which will continue to benefit CIL by making it a more appealing option for customers and allowing it to gain market share, profitability is likely to rise further in the coming quarters as a result of significant e-auction premiums. In Q4FY22, CIL showed excellent top-line growth as well as improved margins and profitability. Hence, we recommend HOLD.

We had recommended Varun Beverages Ltd. in Volume 36, Issue No. 23 dated October 11 to 24, 2021 under the ‘Analysis’ segment. The recommended price for the stock was ₹897. We had recommended the stock on the basis of robust sales growth, expanding product portfolio and unique business model. Varun Beverages Limited (VBL) is a major participant in the beverage sector and the world’s largest PepsiCo licensee outside USA. The company manufactures and distributes a variety of carbonated soft drinks (CSDs) as well as a variety of non-carbonated beverages (NCBs), including packaged drinking water, under PepsiCo trademarks.

Analysing the financial performance of the company in the recent quarter, the net profit zoomed by 26.33 per cent from ₹2,269.88 crore in Q4FY21 to ₹2,867.48 crore in Q4FY22. However, the operating profit shot up significantly by 39.28 per cent in Q4FY22 to ₹539.50 crore as compared to Q4FY21 which was ₹387.35 crore. Consequently, the net profit climbed sharply, giving almost triple-digit growth of 98.23 per cent. Net profit stood at ₹271.09 crore in Q4FY22 from ₹136.76 crore in Q4FY21.

The annual performance of the company also showed extraordinary results. The net sales results showed growth of 36.65 per cent i.e. to ₹8,958.29 crore from ₹6,555.79 crore in FY20. The operating profit rose to ₹1,722.57 crore in FY22 as compared to operating profit of ₹1,238.84 crore in FY20. The company made a net profit of ₹60.32 crore in FY22 as opposed to net loss of ₹302.56 crore in FY20. During the quarter, strong demand in both domestic and international markets, aided by the early start of summer in India, translated into healthy volumes. VBL has agreed to produce Kurkure Puffcorn for PepsiCo India Holdings Private Limited as part of its network of co-packers, which will require a ₹20 crore investment. The company will likely draw further chances for production of Pepsi’s other food brands once it has established its snack manufacturing skills and gained experience and expertise in the business. Both the Bihar and Jammu plants are now operational, and they will enable the company develop its presence closer to customers, enhance penetration, gain a larger market share, improve cost efficiency, and improve profitability. VBL has had positive free cash flow over the past eight years with an average yearly run rate of ₹330 crore between FY14 and FY21. The company’s management wants to boost the cash flow and minimise debt. As a result of rising demand, operations are ramping up and the pandemic’s impact is fading. Hence, we recommend HOLD.

* Adjusted price for bonus issue

(Closing price as of June 14, 2022)