Rating: BUY | CIL: Stellar Q2 show, outlook positive

I-Sec research

Coal India ltd (CIL) exceeded expectations in Q2FY24 with an EPS of `11.9/share, surpassing both our and consensus estimates by 35% and 25%, respectively. Key points include:

Wage cost management: Wage costs, totalling `116.4 billion, remained at normalised levels and were within our projected estimates.

Provision adjustment: A significant unwinding of the Rs 81.5 billion provision made in FY23 for wage hikes was noted in Q2FY24. This resulted in a reduction of the cash and bank balance to Rs 370 billion.

Dividend declaration: The Board has proposed the issuance of the first interim dividend at 115.25/share.

Looking forward, we anticipate continued improvement in CIL’s performance, with potential consensus EPS upgrades in the range of 25-30%. We maintain our FY24E/FY25E EPS projections. Our recommendation is to Buy. The TP remains unchanged at `395, based on 8x FY25E EPS.

CIL achieved its best-ever Q2 performance driven by increased volumes and higher FSA prices. Key highlights include: (i) FSA prices rose by 9.1% y-o-y to Rs 1,542 due to heightened supply to the non-regulated sector (NRS), with NRS offtake increasing by 29.3% y-o-y to 32.3 million tonnes; (ii) e-auction prices fell by 53.2% y-o-y to Rs 2,838, partially offset by a 52.6% y-o-y increase in e-auction volume to 15.8 million tonnes; (iii) e-auction premium to FSA price declined to 84%, compared to 329% a year ago; (iv) FSA volume grew by 9.2% y-o-y to 154.7 million tonnes, surpassing power sector requirements in H1FY24; (v) cash & bank balance was impacted by arrear payments, reducing provisions by `71 billion; and (vi) the Board recommended an interim dividend of Rs 15.25/share, implying a 4.7% yield at the current market price.

Looking forward, CIL’s performance is expected to further improve, supported by an anticipated uptick in both e-auction prices and volumes.

CIL’s Q2FY24 performance challenges the misconception that e-auction prices alone determine profitability. Contrary to this belief, we assert that volume, encompassing both FSA and e-auction, significantly influences CIL’s earnings. Despite a substantial drop in e-auction prices by 53% y-o-y and a decline in e-auction premium, Q2FY24 Ebitda still registers an 11.8% y-o-y increase. We see an upside risk to our already leading EPS estimates if the strong performance persists through Oct’23.