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Given the energy crisis globally, said analysts, Coal India has been diverting additional coal to the power sector, leaving less coal available for the non-regulatory sector.
Reforms in the e-auction process, on the other hand, have resulted in a consolidation of five e-auctions into a single e-auction for end-users.
"This, in turn, has led to a substantial hike in premium since March 2022. Premiums have shot up more than 290 per cent since the introduction of unified e-auction," said brokerage Motilal Oswal, which expects the demand for thermal coal to sustain over the next two-to-three years, with e-auction premiums over 200 per cent in H2FY23.
The brokerage said that the transition to renewables in Europe will take six to seven years and, in the intervening period, the dependence on thermal coal will remain high, leaving coal in a sweet spot in the near term. Motilal Oswal values Coal India at 3.2 times FY23 adjusted and sees a 10 per cent dividend yield at the current market price, driven by strong earnings and a dividend payout of 50 per cent.
Coal India's production in the ongoing fiscal rose by 44.6 million tonnes (mts) in five months and four days, eclipsing the previous best of 44.5 MTs registered in FY16, which was for the entire year, the company said in a stock exchange filing on Wednesday.
Analysts said negotiations with unions are still underway and the management has been making Rs 100 crore per month provision towards wage hike in FY23. Wage negotiation and resultant price hikes would be key for Coal India's profitability, analysts said.
Edelweiss said it estimates a wage hike at 25 per cent with an offsetting FSA price increase of 6 per cent. "We will keep close tabs on developments in this regard as wage hike and the corresponding FSA price increase are key to maintain profitability," it said.
The brokerage said it remains optimistic about Coal India's prospects as initiatives to boost production and offtake are bearing fruits.
"In the immediate term, robust e-auction premium is likely to keep earnings elevated while in the medium-term, volume uptick through to FY26 appears possible with evacuation infrastructure and production strategy in place. Besides, cost reduction measures, rationalising underground mines, MDO deployment and FMC infrastructure are additional sweeteners," it said.
For now, Edelweiss has taken cognizance of the management’s guidance and raised its FY24 and FY25 sales volume estimates by 5 per cent and 2 per cent, respectively, resulting in EPS for FY24 and FY25 increasing by 25 per cent each. We maintain ‘BUY/SO’ with a revised TP of INR275 (earlier INR250) on an unchanged 6x EPS (core) as we roll over to Q3FY24E earnings.
The average target on the stock, based on 22 analyst estimates, stands at 260.29 per cent, suggesting a 10.74 per cent potential upside.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
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