Coal India: Healthy volume growth visibility

22 Nov 2023 , 11:25 AM

Recommendation: Buy; Target price: Rs 363

 

With M7FY24 production growth of 12%, CIL is well on track to meet its FY24 guidance of 780mt. Depleted stock at TPP and strong power demand growth bode well for offtake subject to the availability of rakes. Mgmt is targeting 9% volume growth (850mt) in FY25, which should help increase e-auction allocation in FY25. But, this would also drive down e-auction premiums from the Oct’23 levels of 118% (90% as on date). Post healthy Q2, analysts of IIFL Securities increase Ebitda estimates by 10% for FY24- 25, led by higher volume, NSR and lower CoP. They raise target EV/Ebitda multiple to 5.5x on Sep25 (on better growth visibility) for their TP of Rs363. 

Healthy volume growth in M7FY24: 

M7FY24 production of 394mt (up 12% YoY) is well in line with the full-year volume target of 780mt (growth of 11% YoY) for FY24. M7FY24 offtake at 422.3mt is up 9.4% YoY. Despite healthy dispatch growth, coal stock at TPP has fallen to 25mt vs 31mt YoY and peak of 3M7t in May’23 amid strong power generation growth. This should support strong offtake in balance five months for FY24, subject to the availability of railway rakes. Management reiterated that evacuation infra at mines will suffice and offtake should ideally match the production for the year. 

FY25 production target of 850mt should support higher e-auction volumes…: 

Management is targeting production of 850mt for FY25 (9% growth YoY), supported by strong OBR growth (28% higher in 1HFY24) and continued capex towards HEMM, FMC projects and strengthening of evacuation infra (railway projects largely on track). This should support higher e-auction volumes (32mt in 1H vs 62.3mt in FY23) even as supply to the Power sector takes priority. 

…but would drive normalisation of e-auction realisation: 

Strong demand from the Power sector drove up e-auction premiums to 118% in Oct’23. Mgmt indicates the current premium at 90%. Analysts of IIFL Securities build in normalisation of e-auction realisation from Q2 level of Rs2,838/t to Rs2,174 in FY25-26, as e-auction volumes ramp up from the current low levels. Post the FSA price hike taken in May’23 (~3% blended hike), no further price hike is expected in the near term.