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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.

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