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Coal India's black diamonds once shunned, now shining
PSU engaged in the production and sale of coal operates through c. 82 mining areas across 8 states and contributes to 82% of India’s coal production.
Coal India (NSE: COALINDIA), a ‘Maharatna company’ is an Indian central PSU under the ownership (66% stake) of the Ministry of Coal, Government of India. It is the largest government owned coal producer in the world and one of the largest corporate employers in India. COALINDIA’s major consumers are the power sector and non-regulated segments such as steel, cement and aluminum. Products include Coking Coal, Semi/Non-Coking Coal, Washed and beneficiated coal, Middling, Rejects, Tar, Heavy/Soft Oil, and other value-added products.
Domestic power demand to remain alive and kicking
India’s coal demand is expected to reach c.1,500 mn tonnes by FY30 with increased power generation, assuming a c.7% growth in power demand. This is considering growth in renewable energy capacity to 450 GW by FY30 (from 123 GW in FY19). Also, c. 75% of the total power generation in India is via the thermal route and c. 85% of the total coal production in India is supplied to the power sector. COALINDIA is the largest supplier of thermal coal to power sectors (c. 80% of fuel requirement is met by COALINDIA), and hence, power security in India is directly dependent on the performance of COALINDIA.
COALINDIA positioned favorably to benefit from the mounting demand of coal
COALINDIA has pegged 610mt to power plants in FY24E under Fuel Supply Agreement (FSA) to meet long term demand commitments which provide the company with better visibility and predictability around pipeline. It has now set up its in house E- auctions platform and though premiums are cooling off, high volumes are expected. COALINDIA is gaining traction through the government's scheme for rural electrification and ‘Power for All’. COALINDIA’s partnership with Rail PSUs for expanding rail tracks to extraction points and sustained focus on First Mile Connectivity Projects will increase efficiency. With GOI's target of 1,000 mn tonne of coal production by the end of FY24, COALINDIA also has a target to achieve 780mt output for FY24. Foray into Renewable sources like Solar Plant of 3GW and Bauxite mining will help the company realize diversification benefits and reduce the carbon footprint.
In-line operating metrics driven by strong volumes and higher realizations
Revenue/EBITDA stood at INR 1,38,252cr/INR 43,368cr (31.4% margin) at L3Y CAGR 12.3%/15.7%. Net Profit was record high with INR 28,165cr (20.34% margin) at L3Y CAGR 5.4%. Debt-to-Equity ratio is less than 1 and Interest coverage ratio is at 56.5x. Substantial increase in CAPEX amounting to INR 14,209cr with uptick in Asset turnover ratio 0.65x (in comparison to 0.62x in FY22) winks growth. ROCE/ ROE stood at 56.7%/49.1% in FY23. COALINDIA has hiked prices by 8%, which is expected to realize an incremental revenue of INR2,700cr in FY24.
Over burden removal or OBR (“Over burden” is the rock or soil layer that needs to be removed in order to access the ore being mined) stood at 1652mcm in FY23 up 22% YoY (from 1288mcm in FY22). Realization per tonne of coal under e-auction/FSA sales in FY23 was INR 4,841/ INR 1,475, up YoY 157.6%/ 4.91% (compared to INR 1,879/ INR 1,406 per tonne in FY22). Co. has a cash cycle of 23.7days with Quick ratio of 1.45x to support liquidity. Dividend yield of 8.61% makes it one of the highest dividend stocks around.
Valuation seems to be discounted v/s Industry medians
COALINDIA trades at TTM P/E 4.97x. Close comps National Mineral Development Corporation (NSE: NMDC) trades at 6.74x, NLC India Ltd. (NSE: NLCINDIA) trades at 11x, Gujarat Mineral Development Corporation Ltd. (NSE: GMDC) trades at 4.36x. On an EV/EBITDA basis, COALINDIA trades at 2.41x whereas NMDC trades at 3.65x, NLC trades at 7.68x and GMDC at 3.01x. With valuation multiples below industry median of 6.5x, the stock seems to have decent room for increase in prices.
With the government's policies to increase coal production to substitute imports standing at more than 200 million tonnes by FY25 , it would help COALINDIA register sustainable volume growth over the next couple of years. Moreover, cost control initiatives such as reduction of manpower (employee cost accounts for 53-54% of overall cost) would cushion margins. High OBR will help COAL achieve its FY24 production target of c.780 mt. With monopoly in the sector and India’s power security, COALINDIA is well placed to benefit from the rising demand for coal. We are LONG.
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