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Coal India (CIL) has maintained strong operational growth on the back of increased production and higher rake loading, buoyed by high domestic coal demand and continued elevated international coal prices. In Q2FY23, production / offtake was 139.3mnte / 154.5mnte, up 5.1%/10.7% YoY, respectively, while similar figures for H1FY23 were 299mnte / 332mnte, up 19.7% YoY/7.8% YoY, respectively. Production has already increased by a record 49.2mnte YoY in H1FY23, almost double the YoY increase in the entire FY22 (26.4mnte). With this strong performance, growth rate now required to reach 700mnte of production in FY23 reduces to 7.6% in H2FY23 (from 12.4% at the start of FY23). CIL supplied 285.5mnte of coal to the power sector (up 16.8% YoY), comprising 86% of the total offtake, much higher than FY22 (81.6%). Boosted by this, while FSA volumes remain strong, e-auction volumes booked are tepid at 16.6mnte for Apr-Aug’22 which we believe may pick up in H2CY22. However, e-auction premium at 349% for the same period is expected to compensate for lower volumes. We expect dependence on domestic coal to remain strong and e-auction premiums to remain elevated in FY23, which is likely to result in a better FY23, both in terms of volumes and prices. Additionally, any reduction in diesel prices is expected to help lower costs. Maintain BUY.

 Q2 and H1FY23 operational performance – key highlights:

* In Q2FY23, production / offtake was 139.3mnte / 154.5mnte, up 5.1% / 10.7% YoY. Production has increased by a record 49.2mnte YoY in H1FY23, higher than the YoY increase in the entire FY22 (26.4mnte). In H2FY23, growth rate now required to reach 700mnte of production for the year is only 7.6% vs 12.4% required earlier. For H1FY23, production / offtake was 299mnte / 332mnte, up 19.7% YoY/7.8% YoY.

* CIL has been able to liquidate ~33mnte of coal stocks in H1FY23, which stood at ~28mnte at Sep’22-end.

* CIL supplied 285.5mnte of coal to the power sector (up 16.8% YoY) comprising 86% of the total offtake, much higher than FY22 (81.6%). Daily average supply was 1.77mnte in H1FY23, and was 1.7mnte in Q2FY23. This is positive, and the company is making all efforts to ensure adequate coal availability to power and non-power sectors. Total loading to thermal plants increased 23.2% YoY during H1FY23 to 300 rakes per day (243.5 rakes per day in H1FY22).

* E-auction update: During Apr’22-Aug’22, CIL has auctioned 16.6mnte at an average premium of 349%. While we expect e-auction volumes to pick up in H2FY23, the premiums are likely to remain elevated. Lower availability of domestic coal through e-auctions, however, has been somewhat offset by the 59% increase in production from captive mines during 5MFY23 at 46.8mnte.

* CIL’s strong operational H1FY23 performance indicates a better FY23: We expect dependence on domestic coal to remain strong and e-auction premiums to remain elevated in FY23. This is likely to result in a better FY23, both in terms of volumes and prices (CIL expects e-auction volumes at ~100mnte in FY23). We maintain our FY23 estimates of volumes at 695mnte (up 5% YoY) and EPS at Rs40.1/sh (up 42.3% YoY).

* All India coal demand and supply remains high: During 5MFY23, India’s coal production (including captive) was 777.3mnte, up 8.6% YoY, while despatch was 818.1mnte, up 18.3% YoY, both of which are all-time high figures. In 2MFY23, India’s coal production (including captive) was 138mnte, up 32% YoY, while despatch was 149.5mnte, up 13% YoY. In FY22, domestic coal despatch to power sector (including from captive sources) was 677.7mnte, which was 82.8% of the total despatch. In 2MFY23, domestic coal despatch to power sector (including from captive sources) was 127.8mnte, which was 85.5% of the total despatch. India’s coal imports, which had reached a peak of 248mnte in FY20, declined continuously in the past two years to 215mnte in FY21 and 209mnte in FY22, despite a steep rise in the actual demand of coal from 956mnte in FY20 to 1,027mnte in FY22 (906mnte in FY21).

* Coal stock situation much better compared to Oct’21: Coal inventory at power plants stood at 10 days (26mnte) on 1st Oct’22 and is substantially higher compared to 4 days (8mnte) on 1st Oct’21. 56 domestic coal-based operational power plants have coal stock below critical levels (<25% of normative level). However, coal availability is much better compared to last year and we do not expect a repeat of the situation witnessed in Oct’21, when 104 power plants totalling 129GW of capacity breached their critical coal stock levels, and there was substantial disruption in power generation. Increase in production and despatch from October (post the monsoon period) will likely help ease the situation further.

* International coal prices may firm up further: Even though Chinese domestic coal production has increased by 13% in 8MCY22 to almost 3bnte resulting in a decline in imports during the period, droughts have resulted in severe decline in reservoir levels and hydro power generation, which is likely to push Chinese coal imports going forward. Further, factoring in the events in Europe, gas price outlook and supply instability, especially from Australia, we may witness another surge in international coal prices. Aug’22-end prices for Australian coal (6,000kcal/kg) / South African (6,000kcal/kg) / Indonesian (5,900kcal/kg) were US$437 / US$354 / US$167 per tonne, respectively. Sep’22-end Newcastle coal future prices were US$434/te, while Richards Bay API4 coal futures prices were US$295/te. For Oct’22, Indonesia has set its benchmark coal price at US$330.97/te, a record high price, up 3.7% MoM from US$319.22/te in Sep’22. We believe the key lesson for all nations from the energy crises over the past year has been not to put all the eggs in one energy basket but rather diversify, so that extreme events may have milder debilitating impact.

* Valuation: We maintain our BUY rating and our DCF-based target price of Rs294 on the stock. CIL is currently trading at 5.7x P/E and 2.4x EV/EBITDA on FY24E basis with 35.4% RoE. We expect dividend payout to remain high, leading to 8- 10% yield at CMP, despite heavy capex

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