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Volume growth outlook remains robust

Dispatches to clock ~8% CAGR over FY24-26

* Coal India (COAL) reported a production of 46.1mt in Aug’24, down 12% YoY. Accordingly, during Apr-Aug’24, total production reached 290mt (+3% YoY) and dispatches stood at 308mt (+1% YoY). The sluggishness in volume growth recently is primarily driven by the erratic monsoon (especially in key coal-producing states - Odisha, Jharkhand, and West Bengal) as compared to muted rainfall during last year.

* Out of total dispatches during Apr-Aug’24, COAL supplied ~81% to the thermal power industry. COAL targets to clock a production of 838mt in FY25, aided by rising demand from the power sector (~80% share) with dispatches under e-auction at ~15% of total volumes.

* In FY24, COAL achieved 100% of its yearly production target. Subsidiaries (BCCL, CCL, NCL, WCL, and MCL) exceeded their targets. Production at SECL and ECL was confined to 98% and 93% respectively, due to a sluggish start in FY24.

* India’s peak power demand (non-solar) rose to 234GW in May’24 vs. 221GW in Mar’24 and CEA (central electricity authority) projected all India peak electricity demand to reach 277MW by FY27 (366GW by FY32).

* According to CEA, thermal power capacity increased by +5.7GW in FY24. Furthermore, ~29.4GW of thermal power capacity additions are at various stages and are expected to come on stream by Nov’28 (out of which ~11.5 GW is expected to be commissioned by Dec’24).

* We foresee power demand moving in tandem with GDP growth in the near future, which will bode well for COAL as a dominant coal supply. Hence, we expects COAL to post an 8% CAGR in production volume over FY24-26. Aims to clock 1bn ton of production volume in next 2-3 years

* As India moves toward a USD5t economy, its dependency on thermal power plants will rise to ensure 24x7 uninterrupted power supply.

* Currently, the share of power generation through thermal power stands at ~80% (with a 48% installed capacity share), while the remaining is sourced from lignite, hydro, nuclear, gas, and RE (with 42% installed capacity share).

* In FY24, India's coal production stood at ~997mt, out of which ~77% was produced by COAL, making it a dominant player in the coal mining space.

* COAL clocked the highest production/sales of 773.6mt/753.5mt in FY24. Back-to-back double-digit growth in production volume translates into alltime high dispatches of ~619mt to the power sector (+5.7% YoY).

* COAL is increasing its coal-washer capacity by setting up eight coking coal washeries, which will strengthen its position in domestic coking coal. After the completion of all the washeries, the washed coking coal capacity is expected to increase from 1.5mt to over 7mt.

Higher e-auction volume set to improve overall realization

* Global coal prices have significantly corrected due to oversupply and weak demand in China. South African coal (FOB 6,000 NAR) corrected to USD90/t in Feb’24 from peak of USD440/t in Mar’22 and currently hovering around USD105-110/t. Similarly, in line with global trends and domestic demand, COAL's e-auction prices were range-bound at INR2,400-2,500/t during Oct’23- Jun’24 vs. INR3400/t in 3QFY24.

* In FY24, COAL sold ~70mt (~9% of total volume dispatched) via e-auctions at a 99% premium over FSA prices. In 1QFY25, e-auction premium declined to 58%, but volume share rose to 12%, offsetting the impact. In future, COAL targets to achieve ~15% of e-auction volumes. We believe e-auction premiums to be buoyant at ~60%, in line with the past average of ~55-70% (average e-auction premiums over FY10-FY23 were ~71%; excluding FY23). Record capex to intensify evacuation infrastructure and help product diversification

* COAL has intensified capex to improve its evacuation infrastructure. Capex, which hovered around INR65-85b until FY20, tripled in FY23 to INR186b.

* Over the last three years, capex has exceeded budget estimates. COAL has earmarked ~INR167b capex in FY24 and plans to incur INR175-185b in FY25E/FY26E, which will help COAL to develop infrastructure across numerous verticals, such as railway corridors, land acquisitions, HEMM procurement, and CHPs.

* COAL envisages the expansion of coal mines to be funded via internal accruals; however, the company might borrow to undertake diversification projects, such as RE facilities 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 has recently been completed. This washery will improve coal quality by reducing ash content.

* BCCL has recently commissioned its Madhuban coal washery, currently operating at a 5,000 tons per 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 is expected to be commissioned by Jul’24.

Valuation and view

* COAL targets to achieve a production of 838mt in FY25, with dispatches under eauction at ~15% of total volumes. With a robust volume outlook, healthy eauction premiums and lower costs, the outlook for COAL remains positive.

* We maintain our revenue/EBITDA estimates for FY25/FY26. The stock is trading at 4.7x FY26E EV/EBTIDA. We reiterate our BUY rating with a TP of INR600/share, valuing the stock at 6x FY26E EV/EBITDA.

* COAL remains our top pick in the metals and mining sector.

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