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Improvement in operating metrics continue

Open cast output and manpower productivity continue to rise

* COAL reported an improvement in its operating metrics, with output from open cast mines continuing to rise in overall output to 96% in FY22 from 95% in FY20, despite a 4% growth in total output.

* Manpower productivity in both UG and OC mines improved by 8%/7%. The manpower productivity at OC mines now stands at 4,061t per employee. With the opening up of additional mega mines, manpower productivity is likely to improve substantially.

Growth in e-auction premium outweighs a loss in volume

*  Given the energy crisis globally, COAL has been diverting additional coal to the Power sector, leaving lesser coal available for the non-regulatory sector (NRS).

* In addition, reforms in the e-auction process has resulted in a consolidation of five e-auctions into a single e-auction for end-users. This, in turn, has led to a substantial hike in premium since Mar’22. Premiums have shot up more than 290% since the introduction of unified e-auction.

Coal evacuation projects continue, albeit at a slow pace

* COAL, in association with the Indian Railways, has completed a few important railway lines like Tori-Shivpur and Jharsuguda-Sardega lines, with a combined evacuation capacity of 66mt.

* Work is currently underway on doubling and extension of these lines, as well as the setting up of additional railway lines.

Valuation and view

* The demand for thermal coal is likely to sustain over the next two-to-three years, with e-auction premiums over 200% in 2HFY23.

*  The transition of Europe from Russian NG to renewables is about six to seven years appears optimistic. In the intervening period, the dependence on thermal coal will remain high, leaving coal in a sweet spot in the near term.

* The management expects to mine at least 900mt by FY25, which is a hike of ~29%, or an incremental production of 200mt. Of this, 100mt will be through the MDO route. We have assumed FY24 sales of 735mt, with an upside risk, if the MDO projects start delivering.

* COAL trades at 3.2x/4.4x FY23E/FY24E EV/adjusted EBITDA. We expect a 10% dividend yield at the CMP, driven by strong earnings and a dividend payout of 50%.

*  We maintain our recently upgraded TP of INR290, based on 4x FY23E EV/EBITDA (refer our recent note on COAL here).

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