Coal India - Robust Volume Growth And Strong Demand To Drive Performance: Motilal Oswal

Motilal Oswal Report

Focus on volume growth:

To meet the increasing demand for coal in the power sector amid the government’s strong push to ensure a reliable 24x7 electricity supply, Coal India Ltd. has made a long-term commitment through fuel supply agreements. Based on year to date performance, coal is targeting a production of 780 million tonne in FY24 (Motilal Oswal Financial Services Ltd. estimate of 751 million tonne) and 850 million tonne in FY25 (MOFSL estimate 821 million tonne).

E-auction to propel performance; inches up in recent months:

Coal India sells ~10% of its total volume via auction-determined prices and we expect the company to sell ~72mt/76mt/88mt through e-auctions in FY24/FY25/FY26. E-auction premium, which eased in July ’23 after peaking at 329% in Q2 FY23 (in line with softening international coal prices), has rebounded. The revival in demand and rise in international prices have pushed the E-auction premium to a level of 80-100% over the last few months.

Robust capex in the last few years:

Coal India has intensified its focus on capex that will improve its evacuation infrastructure. Capex, which used to hover around Rs 65-85 billion until FY20, tripled in FY23 to Rs 186 billion. Over the last three years, capex has exceeded budget estimates. Coal has earmarked ~Rs 165 billion capex in FY24E, which will help the company develop infrastructure across numerous verticals such as railway corridors, land acquisitions, HEMM procurement, setting up CHPs, etc. Coal has already incurred a capex of ~Rs 105 billion during April -November ’23 (up 7.6% YoY); its FY24 yearly capex is expected to surpass the budgeted target.

Strong execution with stable volumes; reiterate 'Buy':

Coal trades at an enterprise value/Adjusted. Ebitda of 4.2 times FY26E. We roll forward our estimates to FY26. We reiterate our 'Buy' rating on the stock with a target price of Rs 430 (premised on five times FY26E EV/Ebitda). We believe Coal is well placed to capitalize on the growth opportunity ahead.

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