Coal India: Volumes on track

2 Mar 2023 , 12:23 PM

Recommendation: Buy

Target Price: Rs 259

 

Production on track; offtake growth is sluggish

With 68.8mt (up 7% YoY, 6% MoM) production in February 2023, Coal India has posted 14% YoY growth in 11MFY23 production to 620mt. The company is well on track to exceed 700mt of production for FY23. Offtake grew 1.6% YoY in February 2023 and at 5.1% YoY for 11MFY23 (631mt). Hence, the end February 2023 inventory with CIL has increased to 50mt — up 17% YoY and should further increase to 68mt by the end of FY23, as per IIFL Capital Services’ estimates, lending comfort on coal availability amid the peak demand season.

E-auction premiums should moderate incrementally

The January 2023 e-auction premiums had moderated to 182% from a peak of 425% in May 2022. Overall supply situation is much better this year, since: (i) Coal stock with power plants has improved to 33.5mt versus 26mt YoY with 62 plants being critical vs 80 YoY (ii) production from captive coal mines has ramped up well to 93mt — up 31% YoY in 10MFY23 and (iii) price of global thermal coal has moderated sharply versus 2022 peak. Analysts at IIFL Capital Services expect moderate e-auction premiums as we go into the peak summer season.

FCF generation should support DPS of Rs30/share

The improving coal supply situation domestically should drive a moderation in e-auction premiums to more normalized levels. This would mean that Ebitda for CIL would decline in FY24-25 versus the elevated levels seen in FY23. Any FSA price hike (not assumed currently) presents an upside risk to Ebitda and EPS. IIFL Capital Services’ current estimates translates into healthy FCF to easily support DPS of ~Rs30/share of FY24/25.