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The rally in Coal India Ltd’s (CIL) stock exemplifies the resurgence of value investing over growth investing.
Over the past year, the state-owned coal miner’s shares have risen as much as 95% despite a not-so-impressive financial performance in FY24. The subdued results were primarily the result of a sharp 37% fall in price realization of coal sold through e-auction even as volumes rose 13%.
However, this was mitigated by an 8% increase in the volume of coal sold through fuel supply agreements (FSA), where the prices also saw a 4% increase.
Note that e-auction sales are typically more profitable than FSA, with the former’s price realizations much higher. For perspective, even as average e-auction realization fell year-on-year in FY24, it was still almost twice that of FSA realization of about ₹1,540. Overall, this meant consolidated revenue growth stood at just 2% in FY24.
Nonetheless, the factors working in favour of CIL’s valuation are its net debt-free balance sheet and healthy cash generation every year. Going forward, the cash accumulation in books is expected to stay robust even after capital expenditure (capex) and a high dividend payout ratio. This will likely make the EV/Ebitda multiple increasingly attractive. EV is enterprise value; it is market capitalization plus net debt of a company.
While it is difficult to judge how much of Ebitda results into cash conversion, FY23 showed promising results for CIL, with both metrics aligning closely. The variance in FY24 was primarily due to payment of the liabilities, including retrospective wage increases totalling ₹8,153 crore.
However, it is safe to assume that there is a high probability of cash generation matching Ebitda, though sometimes with a lag as CIL’s operations are not working capital intensive (like receivable/debtor heavy infrastructure company or a retail company that has to invest in growing inventory base).
As such, CIL’s prospects for FY25 look reasonable, with e-auction volumes expected to grow about 30% year-on-year to around 90 million tonnes. In FY24, CIL’s total production stood at 774 million tonnes, marginally missing its target. For FY25, it is aiming for 838 million tonnes in production.
Now, assuming that the sales volume to production ratio remains at FY24 level, it should help in about 9% revenue growth even if the blended price realization remains stagnant.
Further, if Ebitda per tonne of ₹636 for FY24 is maintained, then Ebitda for FY25 could turn out to be nearly ₹52,000 crore. After accounting for capex of about ₹18,000 crore and dividend at ₹30 per share, there will still be some surplus net cash in the books, which should have a favourable impact on the EV/Ebitda multiple.
In general, it helps that the limitations of renewable energy have led to a renewed focus on thermal power generation. Coal-based power generation capacity is currently at 211 GW at FY24-end. The government proposes to set up an additional minimum 80 GW coal-based capacity by 2032.
Assuming the consumption ratio of about 3.5 million tonnes per GW and incremental plant load factor of 85%, it should result into additional demand of about 238 million tonnes.
For perspective, CIL supplied 670 million tonnes for power generation in FY24 and even if it gets to supply 75% of the incremental demand, it will still be nearly 35% higher than its current FSA sales.
While these figures may not seem high from an annual growth standpoint, but they have made investors realize that fossil fuel cannot be ignored, at least in the foreseeable future
Small wonder then, the CIL stock has nearly doubled over the last one year. Despite that, it is still offering a dividend yield of almost 5%.
