Strong visibility over growth, costs drive up CIL stock to record high

The share price of Coal India Limited (CIL) hit a multi-year high on the basis of strong recommendations and good numbers for the Index of Coal Industry in November. The public is increasing sector coal mining major production and it is ahead of target. There is clear visibility now about the impact of the wage bill after prolonged negotiations, which enables investors to assess future costs with accuracy. There are cost-control initiatives including the intention to lower employee count by 5 per cent annually. The closure of non-profitable mines should also drive margin improvements.

There is strong production guidance of 780 million tonnes (MT) (FY24), 850 MT (FY25) and 1,000 MT (FY26) implying a CAGR of 12 per cent during FY2023-FY2026. Coal production and offtake saw year-on-year (Y-o-Y) growth of 11.5 per cent and 9.1 per cent, respectively to 460 MT (production) and 485 MT (offtake) in the first eight months of FY24 (Apr-Nov 2023). The 8-month production is ahead of the FY2024 production target of 10.9 per cent growth to 780 MT and CIL could therefore exceed the FY24 target. Offtake was driven by 4.7 per cent YoY growth (399 MT in 8 months of FY24 and target of 610 MT for FY24) in offtake for the power sector, as well as continued high growth for the non-power sector.

The e-auction premium over the fuel supply agreement (FSA) price has improved to between 80—100 per cent which means higher blended realisation compared to June-July premiums of around 60 per cent. CIL targets selling around 15 per cent of production volume for e-auction in H2FY24 versus 9 per cent in H1FY24. This will be significant if the premiums are sustained. A recent surge in international coal prices and strong demand have supported the recovery in e-auction premiums.

The Ministry of Power has an FY24 generation target of 1,750 billion units (growth of 7.2 per cent Y-o-Y) with thermal power expected to be over 75 per cent ensuring demand will sustain. CIL’s FY24 capex plan of Rs 16,500 crore aims to improve railway connectivity for evacuation, first-mile connectivity projects, land acquisition, and more efficient infrastructure.

CIL has around 138 mines, which yield less than 4 per cent of the total production and CIL intends to shut these down in phases. Meanwhile, the top 35 mines contributed 75 per cent to production while the top 83 mines contributed 90 per cent. Since FY17, CIL has reduced its employee strength by 25 per cent (by around 77,000) and targets a reduction to 2,12,000 by FY26 from the current level of 233,000 employees. As costs reduce, margins will improve.

Some analysts have target valuations that are in the range of Rs 430-440, indicating an upside. A possible stake sale in Bharat Coking Coal Limited (BCCL), which could be listed, would unlock more value. Balanced against, further disinvestment could hit the price. Other business risks include lower e-auction premiums if global prices drop, or lower power offtake if power demand flattens. The stock, which closed 1.56 per cent higher at Rs 381.80 on the BSE (after hitting a record high of Rs 386.75), is moderately valued at current levels and it offers a generous dividend payout.