Higher cash flows and moderate valuations to support Coal India stock

Coal India (CIL) produced 89 million tonnes (MT) in March-24, up 6 per cent year on year (Y-o-Y) and offtake was 69 MT, up 7 per cent Y-o-Y. FY24 production was 774 MT, up 10 per cent Y-o-Y. Offtake was 754 MT, up 9 per cent Y-o-Y. CIL targets production of 838 MT in FY25, up 8 per cent Y-o-Y over FY24. Offtake could rise to 825 MT in FY25 and 870 MT in FY26. The subsidiaries South Eastern Coalfields Limited (SECL) and Northern Coalfields Limited (NCL) can increase their offtake by 41 MT and 25 MT in FY25, respectively.

In FY24, CIL dispatched 618.5 MT (up 5.4 per cent Y-o-Y) to the power sector (vs committed volume of 610 MT). The power sector thus accounted for 82 per cent of total dispatches. Dispatches to the non-power sector rose from 108 MT in FY23 to 135 MT in FY24. Inventory has increased in FY24 to 90 MT (69 MT end-FY23).

In Q4FY24, e-auction premiums narrowed to 30–40 per cent, down from 115 per cent in Q3FY24. While blended Q3FY24 operating profit/ton was as high as Rs 594, the unit numbers are likely to drop. But if the e-auction premium could remain at 50 per cent levels, FY26 operating profit can hit Rs 38,000 crore compared to Rs 36,800 crore in FY23. The blended assumption is fuel supply agreement coal accounting for 80 per cent of volume, at an operating profit of Rs 300/tonne and e-auction coal at an operating profit of Rs 1,000/tonne.

Despite the energy transition focus, coal usage should accelerate until 2030. Due to its monopoly status, CIL is likely to maintain good margins and generate free cash. The production target is 1 billion tonnes (BT) by FY26 and even if that target is hit a year later, it implies 9.2 per cent annual growth over FY23-27E. One key risk to this thesis would be the faster adoption of renewable energy.

CIL employs about 240,000 people, and employee cost is the largest component of the cost base contributing about 52 per cent of expenses. The group is reducing its workforce by 10,000 per annum. This implies the CIL group would employ about 170,000 people by FY30. Volume growth with a decline in unit costs could translate into an operating profit growth of 13.2 per cent during FY23-27.

As capex is completed, free cash flows would rise enabling diversification into renewables as the group plans. The generous dividend may also be maintained. The FY24 estimates indicate that net revenues could hit Rs 1.42 trillion, up 3 per cent Y-o-Y over FY23. Operating profit could rise by 8 per cent to Rs 39,756 crore with the margin rising by around 130 basis points to around 27.8 per cent. The net profit could rise to Rs 30,708 crore, up by 9 per cent. FY25 should see a sharp improvement in cash flow. The stock is still moderately valued and it should be a decent investment over the long term.