Buy Coal IndiaLtd For Target Rs.480 By Motilal Oswal Financial Services Ltd
Robust growth outlook; valuation remains attractive
Dispatches to clock ~6% CAGR over FY24-27
*Coal India (COAL) reported production of 202mt in 3QFY25, reflecting 2% YoY growth. As a result, total production for 9MFY25 reached 543mt (+2% YoY), while dispatches stood at 556mt (flat YoY). Of the total dispatches, ~85% were supplied to the thermal power industry.
*The sluggishness in volume growth was primarily attributed to erratic monsoons in coal-producing states such as Odisha and Jharkhand, as well as disruptions caused by the general/state elections. Based on the 9MFY25 performance, we have modeled production of ~787mt (+2% YoY) for FY25E. Earlier, management had guided for production of 838mt in FY25E, driven by rising demand from the power sector (+80% share), with dispatches under eauction accounting for ~15% of total volumes.
*During the last nine months, the company’s coal dispatch share to the power sector declined from ~90% in Jun’24 to 79% in Dec’24 (vs 90% in Dec’23). Meanwhile, the share of thermal power in total power generation (ex RE) in India remained in line with its earlier level of 85%. This highlights the rising demand contribution from non-power players for COAL.
*India’s peak power demand (non-solar) reached 250GW in May’24 and stood at 224GW in Dec’24, against its previous peak of 243GW in Sep’23. The Central Electricity Authority (CEA) has projected that the all-India peak electricity demand will reach 277MW by FY27 (revised to 458GW by FY32 vs 384GW earlier).
*According to the CEA, thermal power capacity in India increased by 5.7GW in FY24. Furthermore, the government plans to add +80GW of coal-based capacity by FY32 to meet India’s base load requirement, which is expected to reach 283GW by FY32.
*We expect power demand to increase in tandem with GDP growth in the near future, benefiting the company as a dominant coal supplier. Hence, we expect COAL's production volume to clock a 6% CAGR over FY24-27.
COAL sets short-term production target of 1b ton
*COAL accounts for ~77% of the total coal production in India, making it a dominant player in the coal mining space. The company clocked the highest production/sales of 773.6/753.5mt in FY24, respectively.
*As India advances toward an USD5t economy, the reliance on thermal power plants is expected to increase to ensure an uninterrupted electricity supply.
*Currently, thermal power accounts for ~75% of power generation (with a 45% share in installed capacity), while the remaining share comes from lignite, hydro, nuclear, natural gas, and renewables (together making up 53% of the installed capacity). ? COAL is expanding its coal-washer capacity by setting up new washeries, which will strengthen its position in the domestic coking coal market and lead to margin accretion.
Capex to drive product diversification and portfolio-mix
*COAL has significantly increased its capex to improve its evacuation infrastructure. Capex, which hovered at around INR 65-85b until FY20, almost tripled to INR167b in FY24. Management plans to allocate INR200b for FY25 and FY26E each, which will support COAL in developing infrastructure across various verticals, such as railway corridors, land acquisitions, HEMM procurement, and the establishment of CHPs
*COAL plans to fund the expansion of coal mines via internal accruals. However, it may partially borrow funds to undertake diversification projects, such as the establishment of RE facilities and coal gasification.
*Solar power is preferred source by the company for its diversification aim and achieving net-zero goals. The company aims to install 5GW of solar capacity, with a target of 3GW by FY30, requiring an estimated investment of ~INR150b. This is an ongoing process and will be achieved in a phased manner, with an additional 2GW planned, involving a future outlay of ~INR100b.
*COAL operates 12 washeries with a combined capacity of 29.35mtpa. Of these, 10 are dedicated to coking coal, while the remaining two are for non-coking coal. The company has recently commissioned 5mtpa of coking coal washeries in BCCL. Additionally, five coking coal washeries with a total capacity of 14.5mtpa are set to be commissioned in CCL.
*The company is exploring the monetization of its four old washeries by leasing them out, along with long-term coking coal linkages to steel companies through auctions
Valuations remain attractive
*We believe COAL's production volume will clock a 6% CAGR over FY24-27, with dispatches under e-auction expected to account for ~15% of total volumes. This growth is primarily driven by the expectation that power demand in India will move in tandem with GDP growth, benefiting the company as a dominant coal supplier.
*The prospects for COAL remain strong, driven by healthy volume expectations, favorable e-auction premiums, and declining costs. Additionally, the recent stock correction offers an attractive valuation, with the stock trading at 3.3x on FY27E EV/EBITDA, below its 10-year historical average of 3.6x EV/EBITDA.
*We reiterate our BUY rating with a TP of INR480/share, valuing the stock at 4.5x FY27E EV/EBITDA.
*COAL remains our top pick in the metals and mining sector.
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