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Strong results; consensus continues to upgrade

* COAL reported yet another quarter of strong, albeit inline performance. Eauction premium at an all-time high of 329% drove the strong performance.

* Net sales grew 28% YoY but was down 15% QoQ to INR298b in 2QFY23. The YoY sales growth was driven by a 23% growth in blended ASP mainly driven by 281% YoY growth in the E-auction ASP, and 5% YoY growth in total dispatch volumes.

* Dispatches were down 13% QoQ which is a seasonal factor, while blended ASP was down 3% QoQ to INR1782/t. E-auction ASP was up 40% QoQ to INR6064/t.

* Adjusted EBITDA (net of OBR) grew 100% YoY after a strong growth of 178% YoY in 1QFY23, but was down 37% QoQ to INR80b (largely inline) – the highest ever second quarter EBITDA for COAL.

* APAT grew 106% YoY but down 32% QoQ to INR60b in 2QFY23 (inline).

* The company recorded a higher OBR provision in the quarter again taking advantage of existing coal inventory to prepare for another round of strong production in 2HFY23.

* We believe the consensus will continue to upgrade its FY23 estimates, driven by strength in the E-auction premiums. We are almost 20% higher than the consensus on FY23 estimates and expect consensus to continue to catch up. 

E-auction continues to drive profitability

* While e-auction volumes dropped ~50% QoQ, the premium soared ~40% QoQ to a record 329%. We believe that the 3Q performance of COAL will be better QoQ with higher volume on e-auction with almost similar levels on premium.

* E-auction premium for Sep/Oct’22 stood at 312%/276% while volumes improved to 4.3mt/4.7mt, respectively. This indicates that the marginal drop in premium in 3Q QoQ will be more than compensated by higher volumes.

* With the onset of winters, we believe the demand for coal for power should slow down somewhat giving the company some headroom for higher nonpower and e-auction dispatches. This in turn should help deliver another record set of profits for 3QFY23.

Valuation and view – raising estimates again

* We believe the world has come to terms that fossil fuel cannot be ignored, at least in the near term. Under-investment by the developed economies in the last decade has proven expensive with no alternate sources of Russian NG in sight other than coal

* Renewables continue to be unreliable with problems either related to (a) availability, (b) costs, (c) storage or (d) safety. As a result, dependence on coal is likely to increase in the near term whether investors prefer the same or not.

* We believe the port-based power plants in India will continue to operate at lower PLF as Europe continues to buy more south African coal, leading to shortage of high grade thermal coal in India (needed for the non-power sector), which in turn will lead to sustained e-auction premiums.

* Integration of all the five different modes of auction into a single e-auction has also lead to improved price discovery of coal and has resulted in a structural shift in e-auction premium.

* We raise our E-auction premium estimate for FY23/24 to 239%/81% from 188%/71%, respectively.

* Consequently, we again raise our FY23 EBITDA/PAT estimate by 22%/27% after a 23% bump up in 1Q. We also raise our FY24 EBITDA/PAT estimates by 6%/3%, respectively, and our TP to INR 325 (up from 265), valuing the stock at 4x FY23 EV/EBTIDA. We reiterate our Buy rating on the stock and COAL continues to be our top pick in the metals sector.

* The stock trades at an inexpensive valuation of 3x/4.8x our FY23/24 EV/EBTIDA. On P/B, the stock trades at 2.6x/2.2x on FY23/24 estimates. The company has declared an interim dividend of INR 15 and we estimate DPS of INR 26.7 for FY23.

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