Volume led profitable growth on the anvil
… About stock: Coal India Ltd (CIL), is the largest coal producer domestically as well as globally. It is a ‘Maharatna’ PSU, operating under aegis of Ministry of Coal.
• Operation spanning 83 mining areas across eight states, currently owing 322 mines including 138 underground, 171 opencast and 13 mixed mines.
• During FY23, CIL produced 703 MT coal contributing ~79% of India’s coal supply and dispatched 695 MT coal with ~84% supplied to power sector.
Investment Rationale
• Coal share in India’s energy basket continues to remain significant: Over ~50% of India’s energy and ~70% of electricity needs are met by coal, making it the primary energy source for the country. Despite growing emphasis on renewable/non-fossil fuel-based energy, it is envisaged that there will be incremental coal based thermal capacity additions going forward to cater to the growing energy needs domestically. Thus, demand for coal is expected to reach ~1.3 to 1.5 billion tonnes by 2030; with Coal India a clear beneficiary. Moreover, we imported ~240 MT of coal as of FY23 of which ~55 MT was coking coal while the rest was non coking coal i.e. ~180 MT, which represents an immediate opportunity for Coal India. Henceforth, we don’t foresee any demand concern for CIL in near future.
• Healthy volume growth in offering amid ambitious production targets: With government’s ambitious plan for 24×7 power supply for all by 2025, CIL has set target of achieving a production volume of 1000 MT by FY26E. With healthy volume growth in the recent past, we have modelled in coal production at CIL to grow at a CAGR of 11% over FY23-26E to 950 MT by FY26E. Key enablers for double digit volume growth are: (i) better evacuation infrastructure in terms of First Mile Connectivity projects by expanding mechanized capacity to 915 MTPA by FY29 (ii) Engaging with Mine Developer Operators (MDO) wherein it has engaged 15 MDO’s for a targeted capacity of ~170 MT and (iii) revival of Underground Mines wherein it has identified 30 discontinued mines with reserve of ~600 MT.
• Superlative financials: ~30% margins, ~40% Return ratios profile: With healthy demand prospects & lean cost structure, Coal India is well poised to record ~30% EBITDA margins with EBITDA/tonne seen sustaining above the ₹500/tonne mark over FY23-26E amid blended realisation of ~₹1800/tonne. This coupled with healthy dividend payout ratio (~50%) results in ~40% Return ratios, making strong investment case for Coal India.
Rating and Target Price
• We have a positive view on Coal India given its leading contribution to India’s energy needs & robust financials (high return rations, cash rich B/S). We assign BUY rating to Coal India with target price placed at ₹500 wherein we have valued it at 4.5x EV/EBITDA on FY26E. High dividend yield of ~7% provides healthy margin of safety to our investment thesis
Click here to read Click here to dowmload IDirect’s Coal India Conviction Idea report dated Jan24
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