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MOSL: COAL INDIA: The black diamond: Once shunned, now sought after

.  COAL INDIA: The black diamond: Once shunned, now sought after

(COAL IN, Mkt Cap USD17.7b, CMP INR230, TP INR290, 26% Upside, Buy)

• 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 near term.
• We believe with continued heat wave in China, the hydro electricity production should reduce further, therefore, increasing reliance on thermal coal.
• We further believe Europe will continue to re-open as well as increase life of its remaining thermal power plants in a bid to shift away from Russian gas, and in the process will fuel demand for thermal coal.

Domestic power demand to remain alive and kicking

• 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 power plants in India will remain shut or operate at a lower rate, putting pressure on domestic coal-based power plants to ramp up generation. This, in turn, will fuel demand for domestic coal.

E-auction premium to remain firm in the near term

• 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-FSA buyers at one platform thereby increasing competition, and
• rising price of South African coal will prompt domestic consumers of South African coal to shift to domestic coal.

Wage cost hike of 15% already factored in our numbers

• We have factored in a 15% wage hike in our FY23 numbers along with a 5% natural attrition, leading to a 10% total increase in wage bill, thereby providing cushion to our PAT estimates.

Valuation and view

• COAL trades at 3.0x/4.3x our FY23/24E EV/Adj. EBITDA. We expect a 10% dividend yield at CMP, as we forecast strong earnings to result in healthy dividends going forward.
• We raise our FY23/24E Adj. EBITDA by 6%/2%, respectively, and consequently increase our TP to INR290 (from INR275) premised on 4x FY23E EV/EBITDA. Maintain BUY.