Coal India: Focused on capacity expansion

2 Aug 2023 , 11:03 AM

Recommendation: Buy; Target Price: Rs 251

 

Coal India’s annual report highlights the focus and investments to support the projected 8% production Cagr over FY23-28, through new mine development, larger capacity HEMM and expanding evacuation infrastructure. At the same time, the company is progressing on new ventures (fertiliser, aluminium, TPP) through JVs. FCF and ROE benefited from the elevated e-auction prices, which offset higher contractual costs and wage provisions. FY24-26 should see normalisation, given the fall in spot coal prices. That said, analysts of IIFL Capital Services expect FCF generation to easily sustain the elevated dividend yield, going forward. 

Focused on capacity expansion for coal and new ventures: 

AR23 projects coal production Cagr of 8% over FY23-28 to reach 1055mn tonnes. This will be supported by completion of various under-execution mining projects totalling 929mn tonnes, capex on equipment (Rs22bn targeted for FY24 on high-capacity equipment) and gains from MDO contracts (total capacity of 170mt, WO issued for 127mt) for coal production. Apart from the earlier announced diversifications into fertilisers, surface coal gasification, aluminium business value chain and thermal power generation — AR highlights plans to explore acquisition of lithium, cobalt and nickel assets overseas. 

Healthy progress on evacuation infra augmentation: 

CIL is implementing 61 first-mile connectivity projects, with capacity of 763.5mt by FY29 — off which, 92mt was commissioned till FY23. This will reduce costs, drive efficiencies and lower emissions. With evacuation capacity of 170mt of the planned 415mn commissioned till date, progress on 7 rail evacuation projects is also healthy. Balance 245mt evacuation capacity would be commissioned by FY25. 

Higher e-auction realisations offset cost pressure in FY23: 

FY23 Ebitda margin of 26.6% was the highest since FY14, as the elevated e-auction prices offset jump in contractual costs and wage provisions. While prices have normalised, margin should see support from the absence of wage provisions. Healthy profitability and stable working capital cycle supported stable FCF and DPS of Rs24.3 for FY23. In FY23, return ratios jumped as well but should normalise incrementally.