Buy Coal India Ltd For Target Rs. 535 Motilal Oswal Financial services Ltd
Modest volume growth; long-term thermal power dominance to remain intact
Modest volume growth for COAL despite muted imports
* COAL’s production in FY26 declined 1.6% YoY to 768mt, while offtake was down 3% YoY at 735mt, the muted volume was primarily attributed to increased competition from captive/merchant coal producers, subdued thermal power plant demand and high inventory levels. We expect COAL to post a modest volume CAGR of ~2% over FY26-28E.
* The rising captive output (12% YoY to 194mt) led to a decline in non-coking coal imports (-9% YoY to 170mt in FY26).
* Higher power-sector inventories curtailed fresh procurement from COAL, where the plant-level inventory peaked at ~50mt (~27 days) in May’25. Dispatches to TPPs fell 7% YoY, with TPP share in offtake moderated to ~80% in 11MFY26 (vs. ~85% in FY25).
* Long-term demand remains supportive, with CEA projecting peak demand at ~363GW by FY30, backed by >40GW of upcoming coal-based capacity. The 20th Electric Power Survey of India estimates a peak demand of 277GW in FY27 and 366GW by FY32, despite FY26 demand undershooting due to early monsoon.
India energy sector - Thermal power dominance to remain intact
* India’s installed power capacity reached ~520GW as of Mar’26 at ~8% CAGR over the past 15 years, driven by an accelerated renewable push. Renewable and thermal capacities stood at ~260GW and ~250GW, respectively, registering a CAGR of ~12% and ~7%.
* Renewables now dominate the capacity mix with ~50% share, overtaking thermal at ~43% as of Mar’26. However, coal continues to generate 65-75% of power, implying sustained coal dependence amid rising industrial and household demand.
* COAL accounts for >70% of India’s coal production (including captives), with ~75-80% supplied to the power sector, reinforcing its dominant position in domestic coal mining.
* India’s coal demand outlook remains strong as it is transiting toward a USD5t economy, with coal consumption estimated to rise to ~1.3-1.5bt by 2030, despite increasing renewable penetration.
Higher e-auction volumes to boost overall realization and margins
* COAL plans to increase e-auction volumes through a mix of strategic, operational, and policy initiatives. In FY25, e-auction sales stood at ~79mt (~10% of dispatches) at a ~68% premium over FSA prices. Management targets to increase e-auction volume to 15-20% of production.
* We believe E-auction premiums to remain healthy at ~60% on account of a rise in global coal prices amid supply disruptions. However, higher production from captive/commercial blocks will be a potential headwind.
Key initiatives to scale e-auction volumes:
* Opening e-auctions to foreign buyers (Jan’26): Direct participation is allowed for buyers from Bangladesh, Bhutan, and Nepal, eliminating reliance on Indian intermediaries.
* Lower EMD requirement: EMD has been reduced to INR150/t from INR500/t, lowering upfront costs and widening bidder participation.
* Higher allocation to e-auctions: Most subsidiaries were instructed to offer up to 40% of their production for e-auctions.
* Single window mode agnostic (SWMA) auctions: This is an e-auction system for selling coal through one online portal, allowing buyers to choose their transport mode (rail/road) after bidding.
Valuation and view
* COAL’s earnings have remained under pressure in FY26, driven by a lack of volume growth amid muted power demand as well as the rising share of captive/merchant mining. However, the surge in global coal prices will drive COAL’s e-auction prices/demand.
* We expect COAL to post a 2% volume CAGR for FY26-28E, while a higher share of e-auction volumes, with a premium of ~70% over FY26-28E, will support overall NSR and margins. This is expected to translate into a CAGR of 5% in revenue and EBITDA over FY25-28E.
* The company’s focus on increasing coal-washer capacity will improve its market share in domestic coking/non-coking coal. Further, management remains focused on expanding its coal mining operations, which will be funded through internal accruals. COAL may, however, consider raising debt to undertake strategic diversification projects such as RE facilities and coal gasification.
* At CMP, the stock is trading at 4.8x on FY28E EV/EBITDA. We reiterate our BUY rating with a TP of INR535, valuing the stock at 5.5x FY28E EV/EBITDA.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
