Sharekhan's research report on Coal India

The first-quarter results have displayed strength, showing a notable 36% surpassing in consolidated PAT at Rs. 7,971 crore (an increase of 44% q-o-q). This growth was primarily driven by better-than-anticipated margins, as employee costs were significantly lower, and a slightly higher blended realization, which was partly offset by decreased other income. The FSA/e-auction realizations stood at Rs. 1,536/Rs. 3,742 per tonne, which exceeded our estimates by 2% and 30% respectively. Although the e-auction premium dropped by 144% q-o-q, it exceeded the expected 90%. The coal offtake reached 187mt (an increase of 5% y-o-y; remained flat q-o-q), with FSA/e-auction volume at 168 mt/16mt, also maintaining a flat q-o-q trend. While international coal prices have softened, potentially affecting e-auction realizations, we anticipate Coal India (CIL) to implement FSA coal price hikes to counter higher costs. Additionally, there has been a robust growth in coal production/offtake of 10%/6% y-o-y during the period of April-July 2023. In general, we anticipate the positive earnings momentum to persist, albeit at a slower rate compared to the peak PAT observed in FY23.

Outlook

The valuation of 5.6x its FY25E EPS (approaching trough valuation) is appealing, and the stock offers an impressive high dividend yield of around 10%. Consequently, our Buy recommendation for Coal India remains unchanged, with a target price (PT) of Rs. 270. The potential stake sale in Bharat Coking Coal Limited (BCCL) and its subsequent listing are expected to unlock additional value.