Due to the positive view on thethermal sector, we recently gave an accumulate rating on thermal power major NTPC on account of importance of energy security. Another PSU beneficiary riding the trend is Coal India. Since our Accumulate call in bl.portfolio dated September 18, the stock has gained around 45 per cent, driven by volume growth, FSA price hike and high e-auction premium.

Even after that, the stock currently trades at a reasonable valuation of eight times its FY24 estimated earnings. The company has a strong balance sheet with cash level to the tune of around 20 per cent of its market cap, which enables it to deliver good dividends to investors; the dividend yield is around 7.37 per cent at its current market price. Hence, we continue to maintain a positive view on the company and investors can accumulate the stock on dips in view of reasonable valuation, strong fundamentals and positive industry dynamics.

Business

Coal India Ltd, conferred with Maharatna status, is one of the largest coal producers in the world. It is primarily involved in the production and sale of coal and generates most of its revenue from its coal operations.

As of now, the company has 318 working mines out of which 158 are open-cast, 141 are underground and 19 are mixed mines. It produces majority of coal from the open-cast mines. This is because production from underground mines faces issues such as longer gestation periods with lack of skilled labour, unavailability of indigenous equipment, and high departmental production cost. However, open-cast mines are more impacted by rain than underground mines. The company majorly produces non-coking coal to be supplied to thermal power generation companies, besides supplying coking coal to steel companies.

Majority of CIL’s revenue is tied to the long-term Fuel Supply Agreements (FSA) wherein it sells annual contracted quantity (ACQ) of coal at a notified price based on quality that can be revised as and when required. Such arrangement provides revenue visibility. If CIL is not able to meet demand under FSA, it can meet shortfall through importing coal and can supply it on a cost-plus basis.

Further, the company sells coal on spot basis to those whose coal requirement is seasonal and who are not willing to enter into long-term linkage. FSAs, being agreements for relatively longer-term frame, have fewer provisions for price changes. On the other hand, e-auctions are very much likely to reflect the increasing global prices, which are generally on the higher side compared to FSA notified price.

Performance

During H1FY24, CIL achieved a YoY growth in production and offtake of 11.3 per cent and 8.6 per cent, taking it to 332.91 MT and 360.66 MT respectively. Of the total offtake, nearly 91 per cent came from FSA and the rest from e-auction as against around 73 per cent from FSA in last year. However, the management guides for around 15 per cent of offtake through e-auction during H2FY24 — and for 16 per cent YoY growth in volumes during FY24 reaching 780 MT.

Further, the company’s realisation during the period slipped by around 4 per cent to 1,696.57 per tonne owing to 33 per cent fall in e-auction realisation, which was compensated by 17 per cent rise in FSA realisation. The increase in FSA realisation is driven by recent price hikes for the grades of coal comprising 30 per cent of its volumes.

Of late, there has been some movement in the e-auction premium over FSA — it spiralled to around 137 per cent in April, 2023, dipped to 55 per cent in June, then moved higher to 78 per cent in August and has currently stabilised at around 90 per cent.

The company saw around 6 per cent YoY rise in its operating revenue during H1FY24 at ₹68,760 crore, driven by increase in volumes and compensated by decrease in realisation. Its EBITDA and PAT during the period have remained stable at around ₹20,125 crore and ₹14,754 crore respectively. CIL might see a decline in profitability in the near term owing to normalising e-auction premium and higher wage cost. However, this shall be supported by annual 5 per cent cut in manpower and the company’s plan to increase e-auction mix.

Outlook

CIL targets increasing evacuation capacity to meet volume target of around 780 MT, 850 MT and 1,000 MT by FY24, FY25 and FY26 respectively. Consequently, management guides for an annual capex of ₹16,500–18,000 crore over the next five years. These targets are coming on the back of management’s anticipation of higher coal demand from the power sector till 2030. During H1FY24, capex to the tune of around ₹7,065 crore has been made while for FY24, ₹16,600 crore has been targeted.

The capex also includes a portion for developing first-mile connectivity projects (for smooth transition from mine to pithead). An estimated total capex of around ₹24,750 crore shall be made for these projects by FY29. Further, the company has a plan to set up 3,000 MW of solar in the next 3-4 years. Out of 3,000 MW, 250 MW of capacity is planned to be installed by FY24. 

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