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Growth momentum continues; upgrade to BUY

Coal India (CIL) reported consolidated net revenue of INR 360bn (+2.5% YoY, -5.7% QoQ), 2% above JMFe. Adj. EBITDA (ex-OBR) came in at INR 112bn (-12.5% YoY), ahead of JMFe of INR 92bn as well as consensus estimates, led by significant reduction in contractual expenses and lower consumption of stores and spares. Adj. PAT stood at INR 86bn (-8% YoY, +18% QoQ), ahead of JMFe/consensus by 25%/22%. Going forward, the momentum in monthly production and the trajectory of global coal prices remain key monitorables. The stock has corrected in recent months (post OFS); however, the company continues to show improvement in production and better-than-expected realisation in e-auction prices, leading us to upgrade our rating from HOLD to BUY while maintaining our SOTP-based TP of INR 255.

* Operational highlights: Blended realisation shrank by 3% YoY to INR 1,769/ton largely on account of 14% decline in e-auction realisation (INR 3,742/ton) but partially offset by 6% YoY growth in FSA realisation (INR 1,536/ton). CIL sold 168MT under FSA (vs. 154MT in 1QFY23) and 16.1MT in e-auctions (vs. 20.9MT in 1QFY23). Progressively, CIL’s production has soared to 229MTs till Jul’24 and the company looks well placed to achieve its target of 780MT production for FY24 vs. 703MT achieved in FY23.

* E-auction premiums to normalise: E-auction premiums had shot up almost 4x since the introduction of unified e-auction, which further benefited from high international coal prices and increased demand from the power sector. However, e-auction prices have started softening since 2QFY23 (INR 3,742/ton in 1QFY24 from a high of INR 6,064/ton in 2QFY23) due to moderation in international coal prices as envisaged in our report ‘Utilities: What we are tracking in 2023?’. We expect the same trend to continue in FY24, which will likely limit the incremental benefits.

* Outlook: Thermal coal imports on a monthly basis are assessed at ~16-17MT in 1QFY24 against the average of 14MT in FY23. However, in a scenario where there is not much improvement in demand, lower e-auction prices may reduce imports, which are expected to drop to 155MT in FY24 from 166MT in FY23. The government in order to ensure uninterrupted power supply has been taking various measures such as ensuring adequate domestic coal production, improving coal evacuation infrastructure, blending of imported coal, compulsory running of imported coal-based plants, etc. This bodes well for CIL in terms of higher production and offtake.

* Growth strategies: The Government of India has encouraged the use of Mine Developer Operators (MDOs) in the coal industry to improve efficiency and productivity. Of the 15 MDO projects (11 OC and 4 UG) having a combined targeted capacity of 170MT, work orders were issued for nine projects of 127MTPA capacity during FY23. Three of the nine projects have already begun mining operations and of the remaining six, bids are under evaluation for two projects while for four projects, the tendering process is on. 24 Coal Mining Projects with a total capacity of 140.3MTPA were approved in FY23; total sanctioned capital for these projects is INR 221bn.

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