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Meeting expectations; Bright prospects ahead

Coal India (CIL) reported consolidated net revenue of INR 328bn (+10% YoY, -9% QoQ), -3% JMFe. Adj EBITDA (ex-OBR) came in at INR 88bn (11% YoY,-11% JMFe) due to lower than expected volume (16 MT/20 MT actual/JMFe) & realization (INR 2,838/3,300 per MT actual/JMFe) in e-auctions. Adj PAT stood at INR 76bn (+12% YoY, -12% QoQ), -3% JMFe. India is clocking all-time high peak power/energy demand growth (12.7%/8.6% YoY growth during Apr-Oct’23) and increasing incidences of power shortages, the demand for coal continues to remain robust which is supported by growth momentum in production (YTDFY24, +11% YoY), we estimate CIL to report 781/859/936MT of production during FY24E/25E/26E. With consistent growth in production and consolidation in international coal prices, we reiterate our BUY rating on the stock with a TP of INR 360 (earlier INR 320).

* Operational highlights: Blended realisation shrank by 3% YoY to INR 1,723/t largely on account of a 53% decline in e-auction realisation (INR 2,838/t) but partially offset by 9% YoY growth in FSA realisation (INR 1,542/t). CIL sold 155MT under FSA (vs. 142MT in 2QFY23) and 16 MT in e-auctions (vs. 10MT in 2QFY23). Progressively, CIL’s production has soared to 354MTs till Sep’23 and the company looks well placed to achieve its target of 780MT production for FY24 vs. 703MT achieved in FY23.

* Power demand remains strong: The peak/energy power demand recorded 12.7%/8.6% YoY growth during Apr-Oct’23. The all-India peak demand touched 240 GW on 1st Sep’23 breaching the previous high of 237/223 GW in Aug’23/Jun’23. Increasing total energy shortage particularly during non-solar hours (6-9 GW in Aug’23) is leading to a renewed focus on coal-fired power generation. With 26.7 GW of thermal power capacity under construction, 25 GW of projects under various stages of tendering, and another 30 GW under planning, we expect the demand for coal for power generation to consistently grow over the next decade.

* Production to sustain growth: Coal India supplied 587 MT of coal to the power sector during FY23 and is targeting an off-take of 610 MT in FY24. We estimate CIL to report 781/859/936 MT of production against the internal targets of 780/840/1,000 MT for FY24E/25E/26E respectively. With recent initiatives such as Mine Developer and Operator (MDO) along with increasing power demand and the government’s renewed focus on higher thermal capacity additions, we expect CIL’s production to steadily increase and sustain the growth momentum in alignment with power demand.

* International coal prices stabilising: The e-auction prices have softened since 2QFY23 (INR 2,838/ton in 2QFY24 from a high of INR 6,064/ton in 2QFY23) due to moderation in international coal prices. Currently, Indonesia coal prices (5,900 GAR), which have corrected sharply (USD 218/ton in Mar’22 to USD 88/ton in Aug’23) are consolidating (USD 88-90/ton) and are expected to remain range-bound. So, we believe that e-auction prices will appreciate as envisaged in ‘King Coal’ is coming back and leading incremental improvement in margins