Coal valuation in India: buy; Strong demand to increase income


We expect global coal demand to remain strong in the near term as the world recovers from the pandemic and Europe turns to renewables (long term) from Russian gas, increasing dependence on coal short term. We believe that with a continued heat wave in China, hydroelectric generation is expected to decline further, increasing reliance on thermal coal. We further believe that Europe will continue to reopen and increase the life cycle of its remaining thermal power plants and in doing so will fuel the demand for thermal coal.

Domestic coal demand will remain strong

India’s coal consumption is expected to increase, as will its thermal coal imports in the near term. As Europe continues to buy more South African coal, we believe that port power plants in India will either remain closed or operate at a lower rate, putting pressure on domestic coal power plants to increase their production. This, in turn, will fuel domestic coal demand.

Electronic auction premiums will remain firm

We expect e-auction premiums for FY23 to remain in at least triple digits because: the availability of coal for e-auctions has declined significantly, with most coal being diverted to the electricity ; e-auction reforms brought together all buyers of non-energy supply agreements on a single platform, increasing competition; the rise in the price of South African coal will encourage domestic consumers of South African coal to switch to domestic coal.

A 15% increase in labor costs is taken into account

We have factored in a 15% salary increase in our FY23 numbers as well as 5% natural attrition, providing a cushion to our PAT estimates.

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Estimate and view

Coal India is trading at 3.0x/4.3x our FY23/24E EV/Adj. EBITDA. We expect a dividend yield of 10% at the current market price, as we expect strong earnings to translate into healthy dividends going forward. We breed our FY23/24E Adj. Ebitda by 6%/2%, respectively, and increased our TP to Rs 290 (instead of Rs 275), based on 4x FY23E EV/Ebitda. Maintain Buy.


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