Strong market outlook to keep Coal India stock at elevated levels

The adjusted operating profit increased 11 per cent y-o-y to Rs 8,900 crore, owing to lower-than-expected employee costs, lower contractual expenses, and input costs

Coal India’s (CIL’s) second-quarter (Q2) 2023-24 (FY24) revenue increased by 10 per cent year-on-year (Y-o-Y) to Rs 32,800 crore, driven by higher volumes and fuel supply agreement (FSA) realisation.

The blended average selling price (ASP) was down 3 per cent Y-o-Y at Rs 1,726 per tonne, but the FSA ASP was up 9 per cent Y-o-Y at Rs 1,542 per tonne, while the e-auction ASP declined by 53 per cent Y-o-Y to Rs 2,828 per tonne.

Although the e-auction premium cooled off, it is still above its historical average at around 83 per cent, and it is expected to stay between 80 per cent and 85 per cent for FY24.

The adjusted operating profit increased by 11 per cent Y-o-Y to Rs 8,900 crore, owing to lower-than-expected employee costs, lower contractual expenses, and input costs.

The adjusted operating profit excludes overburden removal, and the adjusted net profit rose by 13 per cent Y-o-Y to Rs 6,800 crore. This was driven by a strong operating performance and lower depreciation. The first interim dividend was Rs 15.25 per share on the face value of Rs 10 for FY24.

The agreement for salaries and wages for non-executive employees was implemented in June, and employee costs from June onwards are being paid at revised rates. The wage outgo should stabilise at Rs 12,000 crore a quarter.

The strong cash position of Rs 37,100 crore supports higher other income. The company could generate Rs 25,000 crore in cash in FY24 against capital expenditure (capex) needs of Rs 16,500 crore in FY24.

Coal production rose by 13 per cent Y-o-Y to 157 million tonne (mt), and sales dispatches grew by 12 per cent Y-o-Y to 174 mt. Dispatches rose by an incremental 28 mt in the first half (H1) of FY24, and dispatches to the power sector increased to 295 mt in H1FY24.

Dispatches to the non-power sector were at 65.7 mt (up 40 per cent Y-o-Y). Overall H1 sales volume was up by 9.5 per cent.

Power demand usually reaches its peak in May due to summer heatwave, but drier monsoons and high economic activity kept demand elevated in Q2FY24. Power demand surpassed the Central Electricity Authority target, with peak demand rising past 240 gigawatt in Q2FY24, driving demand for thermal coal.

CIL maintains its FY24 target for dispatch to the power sector at 610 mt. The Ministry of Power has set the FY24 electricity generation target at 1,750 billion units (up 7.2 per cent Y-o-Y), and the thermal power share is to be over 75 per cent, implying sustained elevated demand for CIL.

The company has begun a fresh round of coal auctions under the Scheme for Harnessing and Allocating Koyala Transparently in India (SHAKTI) B (viii-a) for private power producers who do not have a power purchase agreement.

In a first, the coal put on sale is marked for lifting in three months against six months earlier. This comprises 13.09 mt to be auctioned in October-November.

CIL estimates a capex of Rs 80,000 crore over the next five years while targeting production of 1 billion tonne per annum. It has current estimates of approximately 780 mt in FY24, and it should hit 935 mt by 2025-26.

The Street beat in Q2 and improved outlook on volume, sustainable e-auction premiums, and stabilised wage costs have made the market happy, with the stock climbing by over 5 per cent to Rs 350. Several analysts see an upside to around Rs 375-plus.