Strong volume growth, lower costs positive for Coal India's outlook

Coal India’s (CIL’s) revenue for the first quarter of 2024-25 (Q1FY25) came in at Rs 36,500 crore, up 1 per cent year-on-year (Y-o-Y) and down 3 per cent sequentially, which was in line with consensus.

The blended average selling price was Rs 1,687/tonne, down 5 per cent Y-o-Y and down 1 per cent Q-o-Q, which was below estimates.

The adjusted operating profit (excluding overburden removal or OBR costs) stood at Rs 11,500 crore up 3 per cent Y-o-Y and up 17 per cent Q-o-Q, which beat the street. This was due to lower operating expenses.

The adjusted operating profit/tonne was Rs 587, down 2 per cent Y-o-Y and up 20 per cent Q-o-Q, which was higher than consensus estimate. The adjusted net profit came in at Rs 11,000 crore, up 4 per cent Y-o-Y and up 26 per cent Q-o-Q which was also above consensus.   

The production for Q1FY25 stood at 189 million tonnes, up 8 per cent Y-o-Y and down 22 per cent Q-o-Q with the sequential decline in volumes due to seasonal factors. The volume offtake for Q1FY25 stood at 197 million tonnes, up 5 per cent Y-o-Y and down 3 per cent Q-o-Q.

A change in accounting policy on stripping activity has been retrospectively adjusted for Q1FY25, Q4FY24, and previous financials which have also been restated.

Stripping activity assets will be amortised over the remaining useful life of respective mines and included under depreciation, amortisation and impairment heads. There is a balance of stripping assets of Rs 60,300 crore (as on 30 Jun’24) to be adjusted over the future years in a systematic manner via amortisation.

CIL started non-coking coal washery operations with a capacity of 10 million tonnes per annum (MTPA) from mid-April’24, incurring a total cost of Rs 398 crore. It was the preferred bidder for MP's Khattali Chotti graphite block. The Bharat Coal Gasification & Chemicals Limited (BCGCL) was incorporated as a new subsidiary for the coal gasification business in May’24.

CIL supplies 90 per cent of its production to the power sector and thermal power accounts for over 80 per cent of total generation.

In order to meet future commitments for the sector, CIL targets production of 838 million tonnes in FY25, with dispatches under e-auction at about 15 per cent of total volumes.

CIL did not provide details on realised e-auction premiums, but this can be calculated to be around 47 per cent, down from 66 per cent in Q4FY24. The e-auction premiums have been declining in recent months, but the sensitivity of Rs100/tonne change in premiums is about 2 per cent on earnings.

The estimate is for 8 per cent volume over the next 3-4 years, with a target of 1 billion tonnes compared with FY24 production of 774 million tonnes (and guidance of 838 million tonnes in FY25). E-auction premiums will stay at around 45 per cent for FY25 given that global thermal prices are holding at around $130-140/tonne. The workforce reduction and other cost controls could flatten cost/ tonne. Valuations are around 8-9 times for FY25 earnings per share.  

The strong volume outlook, healthy e-auction premiums, and lower costs implies a positive future. While operating profit margins are likely to normalise over the next two fiscals, the net profit estimates are being upgraded by analysts on the basis of higher OBR reversals.