Coal India: Volume growth on track; FSA hike awaited

24 May 2023 , 11:30 AM

Recommendation: Buy

Target Price: Rs. 285

This will aid jump in e-auction volumes as well, even though e-auction premiums will fall in tandem. Focus is on price hike for FSA volumes (18% EPS upgrade for a 5% hike), which have historically followed 5 yearly wage hikes. Even without the FSA price hike, analysts at IIFL Capital Services see FCF sustaining over ~Rs. 210 billion annually, which would easily support DPS of Rs. 30 annually.

Healthy volume growth trajectory to hold steady

For FY24, government has set a target of 1.012 billion-tons coal production– a growth of 13%. With 79% share of production in FY23, CIL would remain the key driver with FY24 production target of ~780mt (up 11% YoY). FY24 saw a strong start with April production growth of 7.7% on a stiff base and 31% YoY growth in overburden removal. Over FY24-25, the company should benefit from incremental production from 52 mining projects (including 13 new coal blocks) and contribution from blocks allocated through MDO route. Analysts at IIFL Capital Services are building in 8% production /offtake growth over FY24-25.

Wage costs finalized; focus on FSA price hike

Healthy production growth from CIL and from commercial/captive mines auctioned would drive better domestic availability and fall in e-auction realizations from the peak in FY23. Focus is now on possible price hike for FSA volumes where management is engaging with government. While not baked in yet, a 5% hike will drive 18% higher EPS. Overhang of employee cost hike is now resolved, with management indicating no major incremental provisions post the Rs. 92.5 billion provisioning over FY22-23.

Healthy FCF generation and dividend yield to stay

Without assuming any FSA price hike and including a more normalized E-auction realization of Rs. 2,179/t in FY25, analysts at IIFL Capital Services estimate FCF to sustain at over Rs. 210 billion annually – enough to sustain annual dividend payout of Rs. 30/share. This includes annual capex of Rs. 165 billion for FY24-25. FSA price hike will further boost this as and when it happens.