Coal India gains 113% in 10 months, up 235% in 3 years; what lies ahead for this PSU stock?

Shares of Coal India have seen an extraordinary rise since August 2023, consistently breaking record highs month after month. In February, the company's shares surpassed the ₹450 mark for the first time in nine years, and this upward trend continued, reaching a new peak of ₹527 on June 3.

Over the past 10 months, the stock price has surged from ₹229 to its current trading price of ₹489, yielding an impressive return of 113%. This bull run has pushed the stock to gain 235% in 3 years. 

As the largest coal producer in India, the company has significantly benefited from the rising power demand, with the country meeting 50% of its electricity needs through coal-based plants.

With power demand expected to grow significantly in the coming years, the company is gearing up to meet this demand by ramping up production. Over the past four years, it has significantly increased its capital expenditures, exceeding ₹640 billion, said domestic brokerage firm Anand Rathi.

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The company has been relentlessly investing in land acquisition, enhancing railway capacity, undertaking first-mile connectivity (FMC) projects, setting up washeries, and upgrading machinery. These efforts aim to seamlessly increase production to 1 billion tonnes.

In FY24, the company recorded its highest production (773.6 million tonnes) and sales (753.5 million tonnes), marking its second consecutive year of double-digit production growth since inception. This growth was driven by record dispatches to the power sector, totaling 618.5 million tonnes, up 5.4% year-on-year.

While coal-based thermal power accounts for 47.6% of installed capacity, it contributes approximately 72% of total generation. As a major player in domestic energy, the company's role is crucial to power security in India.

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Despite a growing focus on renewable energy, the sector faces numerous challenges, ensuring that reliance on thermal power plants will persist, providing long-term power security for India. The brokerage anticipates that coal demand will continue to grow until 2035, after which it will slow down.

India requires 1,235 to 1,240 million tonnes of thermal and coking coal annually, with thermal coal comprising 89-90% of this demand. The power sector, including captive power plants (CPP), accounts for approximately 88% of thermal coal consumption. In FY24, India produced around 930 million tonnes of thermal coal, with the remainder being imported.

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Record capex

Capex is directly linked to the increase in production. Over the last four years, the company has been increasingly spending on capex. It took almost 12 years to increase production by 167m tonnes, from 430m tonnes in FY10 to 596m tonnes in FY21.

However, it took only four years to reach 774m tonnes (177m tonnes of increased production between FY21 and FY24). Though capex is estimated at ₹165 billion for FY25, as seen over the last few years, it is highly likely to exceed the guidance, the brokerage highlighted. 

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50% of capex would be utilised to enhancing machinery and acquire land; the rest for solar projects, coal washeries and mines development. 

Enhancing railway infrastructure

In the last few years, the company has sharpened its focus to strengthen dispatches via the railways. Under its Coal Logistics Policy, it plans to address the issue of logistics by constructing railway infrastructure, FMC projects and increasing rail connectivity.

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This planned infrastructure would not only help in strategically shifting logistics to rail, which is in line with its long-term production target, but also ensure timely availability amid rising demand.

Valuations

Considering all the positive triggers, the brokerage estimates an 11.9% revenue CAGR over FY24-26, driven by the volume ramp-up from FSA and e-auctions. Further, in line with various cost-saving measures and RM linkages, it estimates EBITDA/tonne of ₹554.

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On greater volumes, improved logistics, shutting of unviable mines, fewer employees and growth in power demand, the brokerage values the company at 6x FY26e EV/EBITDA to attain a target price of ₹545 apiece.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.