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Robust demand to drive volumes; e-auction premium softens amid high supply

* In a recent investor interaction, Coal India (COAL) management highlighted the following points: a) COAL would achieve production of 770mt in FY24 and 838mt by FY25; b) e-auction premiums have softened in 4QFY24 to 35- 50%, but volumes via the e-auction route have improved (15% vs. 8-9% in 9MFY24); and c) the company is committed to supplying at least 610mt to the power sector in FY24 and increasing the dispatch by 50mt p.a. going forward.

* Based on the YTD performance, COAL is confident of achieving 770mt of production during FY24, with five subsidiaries on track to achieve 100% of the annual production target. The number is lower than earlier guidance as SECL subsidiary would fall short by 8-9mt due to some pending clearance for mine.

* Though e-auction premiums have declined in Jan-Feb’24 to 35-50% from 117% in 3QFY24, the increase in e-auction volumes (~15% of the quarterly dispatches vs. 8-9%) would largely offset the impact.

* Domestic power generation is expected to grow by 7.7% to 1,750bu in FY24, which will drive coal demand. Dispatches to coal-fired plants till Jan’24 stood at 509mt (up 7.3mt YoY) and are expected to cross 610mt in FY24E.

* In line with the recent trend in e-auction premiums, we have trimmed our eauction premium for FY26E while increasing e-auction volumes. As a result, we have increased FY26E revenue/EBITDA/APAT by 1%/9%/7%. COAL trades at EV/EBITDA of 4.9x FY26E. We reiterate our BUY rating on the stock with a revised TP of INR520 (5.5x EV/EBITDA). We believe COAL is well placed to capitalize on the growth opportunity ahead.

Key takeaways from investor interaction

* E-auction premiums dropped to ~48-50% in Jan’24 and to ~38% in Feb’24. Eauction premiums for FY24E are expected to be ~80%.

* E-auction volumes in Jan’24 stood at 13% of the sales and improved to 17% in Feb’24. COAL aims to achieve quarterly e-auction volumes of over 15% in 4Q.

* COAL has slightly lowered its FY24E volume guidance to 770mt and FY25E production target to 838mt. This was due to lower mining at SECL subsidiary.

* The company is expected to dispatch over 610mt to the power sector in FY24E, and volumes to the power sector are expected to grow ~50mt in FY25E and FY26E. No FSA price hike is expected in the near term.

* COAL has earmarked a capex of ~INR165b for FY24E and ~INR175-185b for FY25E and FY26E, which will be utilized for the railway capacity expansion, first-mile connectivity projects (FMCP), land acquisition, setting up coal washeries, and infrastructure development.

* Employee costs are expected to slightly decline going forward. The demand momentum is expected to remain intact and COAL does not foresee any offtake issues.

E-auction to remain stable; e-auction volumes to see strong growth

* Though the premiums have declined from the recent high of 117% in 3QFY24 to 50-60% in Jan’24 and further to ~40% in Feb’24, higher volumes in 4QFY24 will offset the impact.

* COAL is expected to sell ~15% of its total volumes under e-auction at auctiondetermined prices in FY25E. We expect COAL to clock total sales of ~90-92mt via e-auction in FY25E and 112-115mt in FY26E.

* Higher sales via the auction route help garner better profitability as the prices are higher than FSA-determined prices. If the linkages are adequately met, COAL can take its e-auction volumes to 20%, which is otherwise expected to be ~15%.

* Initially e-auction was linked to international coal prices; however, as the supply by COAL in the domestic market increases, the e-auction prices would be determined by the inventory the company carries, inventory at power plants and demand from non-regulated sectors.

COAL targets production of 770mt in FY24E and 838mt in FY25E

* COAL is on track to achieve 100% of its yearly production target for BCCL, CCL, NCL, WCL and MCL; however, due to issues at the beginning of FY24, the actual production at SECL would be 8-9mt lower than its yearly production target of 197-200mt. Hence, COAL could end the year with volumes of 770mt. The company has slightly lowered its FY25 volume guidance to 838mt.

* As a part of its ACQ, COAL supplies around 90% of its production to the power sector and is expected to supply 610mt to power plants in FY24E, which would increase by ~50mt in FY25E and FY26E.

* India’s power demand reached its peak at over 243gw in Oct’23, which helped COAL generate strong volumes. COAL’s supply to coal-fired plants till Jan’24 stood at 509mt (up 7.3mt YoY).

Record capex to intensify evacuation infrastructure and help product diversification

* COAL has intensified its focus on capex over the last few years. Capex, which used to hover around INR65-85b until FY20, tripled in FY23 to INR186b and COAL has earmarked INR165b as capex for FY24E and INR175-185b for FY25E and FY26E.

* COAL envisages the expansion of coal mines to be done via internal accruals; however, the company might borrow to undertake diversification projects such as setting up RE facility and coal gasification. COAL recently acquired a 300mw solar RE contract in Gujarat.

* MCL has commissioned a 10mt non-coking coal washery at Lakhanpur, Odisha, and a trial run hasrecently been completed. This washery will improve the coal quality by bringing down ash content.

* BCCL has recently commissioned its Madhuban coal washery and is currently operating at 5,000t/day capacity. Compliance is underway for the 3mt Kathara and 2.5mt Dhori coking coal washeries, which are expected to be commissioned by FY27E. BCCL’s 2mt Bhojudih coking coal washery is under construction and expected to be commissioned by Jul’24.

* After the completion of all the washeries, the washed coking coal capacity is expected to increase from 1.5mt to over 7mt.

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