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Coal India, the nation's largest mining conglomerate, has experienced a remarkable resurgence, with its shares soaring 19 percent over the week, making it the top performer on the Nifty 50 index. This rally marked the highest weekly gain for Coal India since its initial public offering (IPO) back in 2010.

Here are the four key reasons for Coal India's comeback:

Surge in thermal power generation

The first factor is the impending surge in thermal power generation, driven by the escalating demand for electricity. With the anticipation of increased coal demand from the power sector in the second half of the fiscal year, Coal India is well-positioned to capitalise on this burgeoning power demand. As coal demand swells, it is not only beneficial for Coal India but also aids e-auction prices. During the first five months of fiscal year 2024, India's power generation saw a 6.4 percent year-on-year increase, driven by improved industrial activity.

Despite the growing use of renewable energy sources, which accounted for 14 percent of the energy mix in the first five months of fiscal year 2024 (compared to 12 percent in the same period of fiscal year 2023), thermal power maintained its dominant position, making up approximately 73 percent of the total energy mix. On the other hand, hydropower generation experienced a 1.6 percent year-on-year decline and may continue to decrease in the second half of fiscal year 2024.

Robust operational performance

Coal India's operational performance has been nothing short of stellar. In FY24, the offtake surged 8 percent, reaching 305.5 million tonnes (MT) compared to the previous year's 283.1 MT.

August 2023, in particular, stood out with a 15 percent increase in offtake, registering 59 MT against the previous year's 51.2 MT.

It is imperative to note that Coal India's ambitious target for FY24 is set at 780 MT, as opposed to the previous year's 703 MT. Even though some brokerages, like Nuvama, are conservatively estimating 745 MT, this robust operational performance dispels any lingering uncertainty regarding volume growth at Coal India and sets the stage for potential benefits derived from operating leverage.

E-auction prices on the rebound

A noticeable and significant trend is the apparent bottoming-out of e-auction prices. In August 2023, the e-auction premium rose to 78 percent over the FSA (fuel supply agreement) price. This resurgence comes after a dip in June 2023, when the premium collapsed to around 55 percent from 137 percent in April 2023. The increasing coal demand from thermal power plants is a pivotal driver of this upward trajectory.

As power plants need more coal, there's a possibility that coal previously allocated for other uses might be redirected to meet power generation needs in the second half of fiscal year 2024. This could further boost e-auction prices.

Attractive Valuations

Finally, Coal India's current valuation is quite favourable. The ratio of enterprise value (EV) to estimated FY25 earnings before interest, taxes, depreciation, and amortisation (EBITDA) stands at an attractive 4.5 times, making it an appealing option for investors looking for value in the market.

(Edited by : Shoma Bhattacharjee)