Coal India Rating- Buy- Maintains strong operational quarter

Coal India Rating: Buy| Maintains strong operational quarter

Coal India (CIL) has maintained strong operational growth on the back of increased production and higher rake loading, buoyed by high domestic coal demand and continued elevated international coal prices. In Q2FY23, production/offtake was 139.3mnte/154.5mnte, up 5.1%/10.7% y-o-y, respectively. Production has already increased by a record 49.2mnte y-o-y in H1FY23, almost double the y-o-y increase in the entire FY22 (26.4mnte). With this strong performance, growth rate now required to reach 700mnte of production in FY23 reduces to 7.6% in H2FY23. CIL supplied 285.5mnte of coal to the power sector, comprising 86% of the total offtake, much higher than FY22 (81.6%). Boosted by this, while FSA volumes remain strong, e-auction volumes booked are tepid at 16.6mnte for Apr-Aug’22 which we believe may pick up in H2CY22. We expect dependence on domestic coal to remain strong and e-auction premiums to remain elevated in FY23, which is likely to result in a better FY23, both in terms of volumes and prices. Maintain BUY.

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CIL’s strong operational H1FY23 performance indicates a better FY23: We expect dependence on domestic coal to remain strong and e-auction premiums to remain elevated in FY23. This is likely to result in a better FY23, both in terms of volumes and prices. We maintain our FY23 estimates of volumes at 695mnte (up 5% y-o-y).

All India coal demand and supply remains high: During 5MFY23, India’s coal production was 777.3mnte, up 8.6% y-o-y, while despatch was 818.1mnte, both of which are all-time high figures.

Valuation: We maintain our Buy rating and our DCF-based target price of Rs 294 on the stock. CIL is currently trading at 5.7x P/E and 2.4x EV/Ebitda on FY24E basis with 35.4% RoE. We expect dividend payout to remain high, leading to 8-10% yield at CMP, despite heavy capex.

Key downside risks: (i) Weakness in power sector leading to lower volumes, (ii) weakness in international coal prices (impacting the sentiment and making imported coal more competitive vs domestic coal), and (iii) natural disasters impacting volumes.