We expect global coal demand to remain strong in the near term as the world recovers from the pandemic and Europe shifts to renewables (in the long term) from Russian gas, increasing dependency on coal in the near term. We believe that with a continued heat wave in China, hydro production should reduce further, increasing reliance on thermal coal. We further believe Europe will continue to re-open as well as increase the lifecycle of its remaining thermal power plants and in the process will fuel demand for thermal coal.
Domestic coal demand to remain strong
India’s coal consumption is likely to increase and so will its thermal coal imports in the near term. As Europe continues to buy more South African coal, we believe port-based plants in India will remain shut or operate at a lower rate, putting pressure on domestic coal-based plants to ramp up generation. This, in turn, will fuel demand for domestic coal.
E-auction premiums to remain firm
We expect FY23 e-auction premiums to remain in triple digits at least as: Coal availability for e-auction has reduced drastically with most of the coal being diverted to the power sector; e-auction reforms have brought all non-fuel supply agreement buyers on one platform, increasing competition; rising price of South African coal will prompt domestic consumers of South African coal to shift to domestic coal.
Wage cost hike of 15% is factored in
We have factored in a 15% wage hike in our FY23 numbers along with a 5% natural attrition, thereby providing a cushion to our PAT estimates.
Valuation and view
Coal India trades at 3.0x/4.3x our FY23/24E EV/Adj. Ebitda. We expect a 10% dividend yield at current market price, as we forecast strong earnings to result in healthy dividends going forward. We raise our FY23/24E Adj. Ebitda by 6%/2%, respectively, and increase our TP to Rs 290 (from Rs 275), premised on 4x FY23E EV/Ebitda. Maintain Buy.