Coal India has plenty of steam left. Buy for target price of Rs 395 (25% upside): ICICI Securities

Coal India

CMP: INR 315 Target Price: INR 395 (INR 325) + 25%

Despite the impressive run-up (~37% in the past 3 months), we believe that there is still room for a 25% upside for CIL’s stock price performance. Key points: 1) Production volume likely to be aided by SECL. 2) Demand from power sector likely to stay firm. 3) Record imports by China, amidst looming winter-heating season, likely to aid e-auction prices. 4) E-auction volumes and linkage materialisation to stay elevated, aiding profitability. Taking cognizance of the recent uptick in international coal prices and robust 6MFY24 operating performance, we raise our multiple to 8x (from 7.2x) corresponding to 2 deviations above its past five-year trading range. Our revised TP works out to INR 395 (earlier INR325). We retain BUY on the stock. Our view is also based on a sustainable dividend yield of 9% through to FY25E.

Robust operating performance; favourable macros

CIL’s 6MFY24 operating performance stayed robust. Key points: 1) YTDSep’24 production/offtake is up 10.5%/8.5% YoY, half of which is due to SECL’s volume uptick. 2) Our channel checks indicate that e-auction volume for Sep’23 was at 6.75mnte (up 44% YoY) despite lower premium of 106% (Sep’22: 276%) over FSA prices. 3) Our discussion with non-regulated sector (NRS) players indicate an increasing linkage materialisation – 6MFY24 despatches to steel, sponge iron and cement sectors are up 69% YoY, 42% YoY and 41% YoY, respectively 4) Pit-head inventory is at a comfortable 41mt. Going wider, international coal prices are on an uptrend with Indonesian coal and South African coal price rising by 13% YoY and 37% YoY, respectively. Further, Chinese imports are hovering at record levels – so far in CY23 – up 73% YoY at 348mnte for 9MCY23 amid escalating domestic prices, pre-winter restocking and supply constraints due to mine safety inspections. Hence, we expect e-auction prices to stay firm in the near term, aiding profitability.

Consensus upgrades likely

Despite our sales volume growth assumption of 8% YoY (6MFY24: 8.5% YoY) and FY25E e-auction price estimate of INR 2,590 (currently at INR 3,000), our FY24E/FY25E EPS of 48.1/50.9 is 27%/41% ahead of consensus estimates. We believe that Street is likely to revise its estimates post-Q2FY24 results, once the robust operating and financial performance is taken cognizance of.

Outlook: Getting best of both worlds; maintain BUY

In our view, CIL is at an interesting juncture with both robust volume growth and firm price outlook. For 6MFY24, CIL has met the increased requirements of the power sector and has been able to boost despatches to more profitable NRS. Additionally, the peak wage bill is now behind, and over the next five years, wage expense is likely to fall due to natural attrition at the company. We believe that cash generation would be robust enough for maintaining a dividend yield of 9% p.a. through to FY25E despite an INR 150bn capex p.a. Taking cognizance of the favourable volume/price outlook, we raise our P/E multiple to 8x (earlier 7.2x) corresponding to 2 deviations above its past fiveyear trading average. We maintain BUY with a revised TP of INR 395 (earlier INR 325).