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Strong performance to continue through FY23

* COAL reported a strong, but inline performance in 1QFY23. While sales were ahead of our estimate, adjusted EBITDA and APAT were in line. The company reported a record high e-auction premium of over 201%. We expect this strong performance to continue throughout FY23.

* Net sales grew 39% YoY and 7% QoQ to INR251b in 1QFY23. The QoQ growth in sales was driven by a 10% growth in blended ASP, but was offset by a 1% decline in dispatch volumes. e-auction premium at 201% on a volume of 20.9mt aided the strong QoQ growth in net sales.

* Adjusted EBITDA (net of OBR) grew 178% YoY and 2% QoQ to INR127b (inline) – the highest ever first quarter EBITDA for COAL.

* APAT grew 178% YoY and 32% QoQ to INR88b in 1QFY23 (inline).

* We believe the company is on track to achieve its FY23 production target of 700mt as demand remains robust. COAL is unable to meet the requirement of even the Power sector and has to resort to imports to partly bridge the gap.

E-auction volumes to drop, but premiums to remain strong

* E-auction volumes contracted by 31% YoY and 24% QoQ as the company diverted most of the available coal to the Power sector, leaving a very small quantity to the non-regulatory sector (NRS). This led to a sharp jump in the demand for coal in the e-auctions.

* e-auction premium soared to 201% (est. 180%). We expect a big surprise in the e-auction premium in 3QFY23 as winter draws near and available of coal in the international market dries out, with Europe aggressively buying South African coal to feed its power plant and replace the shortfall in NG supplies from Russia.

* e-auction premiums have been in triple-digits since Dec’21. As months passed by, premiums have climbed to 200% from 100%. In May’22, it stood at 425%, before cooling slightly to 357% in Jun’22. We expect the dream run to continue after the monsoons as demand for coal will revive.

Valuation and view

* Fossil fuel, the dirtiest fuel of the past, has eventually been called upon to save Europe from the NG crunch. With winter approaching and no apparent signs of a truce between Russia and Ukraine, the availability of NG may be further restrained, which, in turn, will raise the demand for coal from Europe to unprecedented levels.

* We expect port-based power plants in India to remain non-operational or prohibitively expensive as international coal prices increase, leading to pressure on COAL to divert additional coal to the power FSA category, leaving the NRS in the lurch, and, in turn, boosting e-auction premiums.

* We also note that the integration of all five varieties of auction into a single eauction has significantly increased the price discovery of coal and has resulted in a structural shift in e-auction premium. With a strong profit generation scenario, we raise our FY23 e-auction premium forecast to 126% from 108%, with a probability of further hikes.

* Consequently, we raise our FY23 EBITDA/PAT estimate by 23% each and the same for FY24 by 9%/11%. We raise our TP to INR275 (from INR220 earlier), valuing the stock at 4x FY23 EV/EBTIDA.

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