Coal India: Still in the Black and Shining

Coal India: Still in the Black and Shining

India is the second-largest producer and consumer of coal. Around 80 per cent of India’s coal production is controlled by one State-run Maharatna entity – Coal India (CIL). CIL is essentially a commodity play with coal prices and volume being the determining factors of its performance.

Strong production and offtake (procured by customers from CIL; typically an indicator of demand) helped CIL show rapid growth in revenue, EBITDA and PAT between FY22 and FY24 at a CAGR of 16 per cent, 37 per cent and 43 per cent respectively. But the recent drop in average price realisation has pulled back the stellar rally seen in this counter, with the stock down around 30 per cent from its 52-week high in August 2024, also dragging the valuation down to 6.7 times its FY26 earnings and the dividend yield up to around 6.6 per cent, calling for attention.

We had last given an accumulate call on CIL in our bl.portfolio edition dated November 26, 2023; since then, the net returns stand at 24 per cent. While our last call was based on reasonable valuation, strong fundamentals and positive industry dynamics, the case holds good now too, post-correction. Thus, we reiterate our last call and recommend investors to accumulate CIL at this juncture.

Operating metrics

CIL is in the business of production and sale of coal and its by-products. As of March 2024, CIL had 313 mines under operation across eight States.

CIL’s coal production and offtake stood at 774 million tonnes (mt) and 754 mt for FY24, growing at a good CAGR of 6.5 per cent and 6.7 per cent since FY20, while the 9M-FY25 provisional figures also show a 2.2 per cent and 1.6 per cent growth respectively, over the previous period. Such solid execution was on the back of sequential increase in capacity utilisation which stood at 93.8 per cent for FY24 (vs 85.8 per cent in FY23 vs 77.1 per cent in FY22) and sustained capex (which was at ₹23,475 crore for FY24, more than double the average capex prior to FY21). Better availability of railway rakes (a legacy issue) also helped in offtake.

Overburden removal (removing the layer of soil above the mineral deposits), essential for ramping up operations, has also been improving sequentially. It was at 1,964 million cubic metres (mcm) for FY24 as against 1,659 mcm in FY23 and 1,362 mcm in FY22.

CIL sells coal largely via fuel supply arrangements (FSA), contributing an average of 85 per cent since FY21, while e-auctions add up to around 12 per cent. While FSAs are largely regulated fixed contracts, realisations are fixed for years subject to adjustments. And from December 2023, the tenure of FSAs have been extended from the earlier five years to 10 years, lending increased revenue visibility.

E-auctions, meanwhile, aimed at plugging short-term or seasonal demand are priced based on prevalent market conditions, and hence are normally at a premium to the FSA-notified price.

Financial metrics

Following strong performances in FY22 and FY23, FY24 was much softer with revenue and EBITDA growing 2.1 per cent and 8.4 per cent year-on-year respectively, while PAT growth was relatively better at 17.6 per cent. However, H1 FY25 saw revenue, EBITDA and PAT declining 4.1 per cent, 2.8 per cent and 7.2 per cent as against H1 FY24 with the declining realisation from FY24 making a dent.

Average realisation from e-auctions started dropping after FY23 with the realisation observed in H1 FY25 at half of FY23’s, reflecting the prices normalising globally. While a 37 per cent y-o-y drop in realisations from e-auctions in FY24 were marginally offset by a 4 per cent increase in realisations from FSA, H1 FY25 saw realisations from both segments fall 20 per cent and 2.5 per cent respectively.

The volume mix also impacted with e-auction volumes growing slower than FSA volumes.

Outlook

Target production for FY25 is at 838 mt with 9M FY25 provisional figures at 543 mt. However, with Q4 historically being the strongest quarter for CIL, clocking in around 30-35 per cent of the annual production, a lot hinges on Q4 FY25 to meet the target.

Also, bottomline is expected to sequentially decline in FY25 on account of the adverse volume mix and lower price realisations, which will be key monitorables.

Overall, these trends are not unusual given its a commodity play and hence tends to be cyclical. For a capital-intensive sector, CIL stands out with a monopolistic advantage and a strong net cash balance sheet (cash at 15 per cent of its market cap). And despite the short-term headwinds, at current levels, valuation together with dividend yields stand out as compelling draws.

Coal amidst the Green

The shift towards renewables is real despite a few hiccups, prominently the lack of transmission network in place.

India, especially, has made rapid strides in this space, with renewables contributing to around 87 per cent of net capacity additions made since FY22, as explained in our Big Story dated October 21, 2024. But, while the share of renewables in total power generation has increased at a brisk CAGR of 16.2 per cent during FY16-24, the drop in share of coal-based power (despite an increase in absolute terms) has been unhurried at a CAGR of 0.34 per cent.

With power sector continuing to be the largest off-taker raking in around four-fifths of CIL’s total offtake and India planning to add around 80GW of thermal capacities between FY23 and FY32, till things on the renewable front stabilise, reliance on coal is here to stay.



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