Coal India, the nation's largest mining conglomerate, has experienced a remarkable resurgence, with its shares surging 19 percent over the week, making it the top performer on the Nifty 50 index. This rally marked the highest weekly gain for Coal India since its initial public offering (IPO) back in 2010.

There are several key factors contributing to this resurgence

Surge in Thermal Power Generation: One significant factor is the anticipated surge in thermal power generation, driven by escalating demand for electricity. With the expectation of increased coal demand from the power sector in the second half of the fiscal year, Coal India is well-positioned to capitalize on this growing power demand. This increased demand for coal not only benefits Coal India but also supports e-auction prices. India's power generation saw a 6.4 percent year-on-year increase during the first five months of fiscal year 2024, driven by improved industrial activity. Despite the growth of renewable energy sources, thermal power remains dominant, making up approximately 73 percent of the total energy mix.

Robust Operational Performance

Coal India has demonstrated stellar operational performance, with offtake surging 8 percent in FY24, reaching 305.5 million tonnes (MT) compared to the previous year's 283.1 MT. August 2023, in particular, stood out with a 15 percent increase in offtake, registering 59 MT against the previous year's 51.2 MT. Coal India has set an ambitious target for FY24 at 780 MT, dispelling uncertainty regarding volume growth and setting the stage for potential benefits from operating leverage.

E-auction Prices on the Rebound

Notably, e-auction prices appear to have bottomed out. In August 2023, the e-auction premium rose to 78 percent over the FSA (fuel supply agreement) price. This resurgence follows a dip in June 2023 when the premium had collapsed to around 55 percent from 137 percent in April 2023. The increasing coal demand from thermal power plants is a key driver of this upward trajectory. The redirection of coal to meet power generation needs in the second half of fiscal year 2024 could further boost e-auction prices.

Attractive Valuations

Coal India's current valuation is quite favorable, with an enterprise value (EV) to estimated FY25 earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 4.5 times, making it an appealing option for value-seeking investors in the market.