Unveiling
Coal India Ltd.’s (CIL; CMP: Rs 427; Market capitalization: Rs 263,579 crore) Q3FY24 numbers released last month were better than expected. Since then, though, the stock has dropped more than 10% because of news of the sharp drop in e-auction price.
In the third quarter of 2024, the e-auction premium to the fuel supply agreement (FSA) price was 117%. It has since dropped to 45%. This could mean less EBITDA/ton for CIL in Q4, but we believe the prices reached too high in FY23 and have since dropped to a reasonable level. We also believe that there are other factors at work that have kept CIL in a good position from a military point of view.
Demand for power is going up, which is good for CIL.
Power use rose to 127.8 billion units in February 2024, according to government figures. This is about 8 percent more than the same month last year (YoY). Also, as summer approaches, temperatures will likely slowly rise across most of the country, which will cause more power to be used.
In January 2024, the electricity IIP (Index of Industrial output) was 5.6%, up from 1.2% in December 2023. This shows that the industrial sector is using more energy. The Central Electricity Authority (CEA) says that India’s peak power usage will reach 260 gigawatts (GW) in FY24-25, up about 7 percent year over year.
Getting output to match demand
Because the country needs more energy, the power ministry has set the goal for FY24 to be 1,750 billion units, which is 7.2% more than the previous year.
Eighty-five percent of this energy will come from thermal power, which will help CIL’s plans to grow. After reporting production of 703 million tonnes (MT) in FY23, CIL has predicted that production will reach 780 MT in FY24 and 850 MT/1,000 MT in FY25 and FY26.
Getting things to work better
The mine development operator (MDO) method is being used by both new and brownfield mines by CIL to boost the production run-rate. It is also putting in place first-mile connection (FMC) through train so that coal can get to thermal power plants more quickly. Many of these projects are already under way, and when they’re all done, the FMC projects will increase the rate of mechanized removal from 151 MTPA to 915 MTPA by FY28-29.
Using prices that make sense
The e-auction premium is likely to stay the same at these levels, and prices in the FSA segment may change after the election. Both of these factors should help realizations in the future.
To keep employee costs low
Since the wage deal was finalized last year, we no longer have to worry about higher staff costs. Also, since 4 to 5 percent of employees retire every year, management thinks that the cost of workers, which makes up a big part of its costs, will go down in the future.
Calculation of Value
CIL paid an interim payment of Rs 20.5/share until 9MFY24. For FY24 and FY25, the payout is expected to be about 50%, which is in line with the company’s strategy.
Following the latest drop, CIL is now selling at 5.7 times FY25e EV/EBITDA. Since demand is strong and the dividend yield is around 5 to 6 percent, we think the stock is a good buy at its present price.
Must read book about investing – check here Unveiling Unveiling Unveiling Unveiling Unveiling Unveiling
The mine development operator (MDO) method is being used by both new and brownfield mines by CIL to boost the production run-rate. It is also putting in place first-mile connection (FMC) through train so that coal can get to thermal power plants more quickly. Many of these projects are already under way, and when they’re all done, the FMC projects will increase the rate of mechanized removal from 151 MTPA to 915 MTPA by FY28-29.
The mine development operator (MDO) method is being used by both new and brownfield mines by CIL to boost the production run-rate. It is also putting in place first-mile connection (FMC) through train so that coal can get to thermal power plants more quickly. Many of these projects are already under way, and when they’re all done, the FMC projects will increase the rate of mechanized removal from 151 MTPA to 915 MTPA by FY28-29.