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A few dips does not change future; maintain BUY

Coal India reported a production of 46.1 MT in August 2024, a 12% YoY decline due to extended monsoon rains, especially in key coal-producing states like Odisha, Jharkhand, and West Bengal. Global coal prices have corrected significantly, driven by oversupply in China, leading to the consolidation of Indonesian coal (5,900 GAR) prices around USD 92-96/t, and Coal India’s e-auction prices too remain range-bound INR 2,300-2,500/t. With a doable production target of 838 MT for FY25 (and a more ambitious MoU target of 908 MT), our confidence in Coal India's long-term growth remains strong, supported by favorable macros, including record power demand, renewed focus on thermal capacity addition, and strategic initiatives like MDO. We maintain our BUY rating with an unchanged target price of INR 601.

* Production: Coal India reported a production of 46.1 MT in August 2024, marking a 12% YoY decline. With this, total production for April-August 2024 reached 290.4 MT, a 3.2% growth YoY. The decline in August production was primarily due to extended monsoon rains, particularly in the key coal-producing states of Odisha, Jharkhand, and West Bengal. Notably, India received only 162.7 mm of rainfall in August 2023, 36% below the Long Period Average (LPA) of 254.9 mm (based on data from 1971-2020), making it the lowest August rainfall since 1901, surpassing the previous record of 191.2 mm in 2005. Due to this, company had 13.2% YoY growth in production during Aug’23.

* Moderation in coal and E-auction prices: Global coal prices have significantly corrected due to oversupply in China, the world's largest coal producer. Indonesian coal (5,900 GAR) has declined from a peak of USD 221/t in October 2021 to USD 88/t in August 2023, now consolidating between USD 92-96/t. South African coal (6,000 GAR) fell from USD 430/t in March 2022 to USD 91/t in February 2024, currently stabilizing at USD 104- 107/t. Similarly, Australian coal prices peaked at USD 447/t in September 2022 and are now at USD 135-140/t. Reflecting global trends and domestic demand, Coal India's eauction prices have remained range-bound at INR 2,300-2,500/t from November 2023 to June 2024, down from INR 3,431/t in April 2023.

* Target for FY25: The Government of India has set a production target of 838 MT for Coal India in FY25. However, Coal India has committed to a more ambitious target in its Memorandum of Understanding (MoU) with the Ministry of Coal, aiming for 908 MT of production, INR 1.54 trillion in revenue from operations, and a capex of INR 15.5 billion for FY25.

* JM view: As India experiences record-high peak power and energy demand growth (11.5%/ 8.6% YoY during Apr-Jul’24) and faces increasing shortages during non-solar hours, the government has renewed its focus on adding new thermal capacity (93 GW by FY32), reaffirming coal's importance. Supported by strong demand and production momentum (8% YoY growth in 1QFY25, excluding monsoon months Jul-Aug’24), we estimate CIL to achieve production of 839 MT in FY25E and 915 MT in FY26E. Additionally, Indonesia coal prices (5,900 GAR) have stabilized after a sharp correction (from USD 218/ton in Mar’22 to USD 88/ton in Aug’23), suggesting stable e-auction prices (INR 2400- 2600/ton). Despite short-term challenges, we remain optimistic about CIL’s long-term growth and maintain our BUY rating with an unchanged target price of INR 601.

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