Buy Coal India For 26% Potential Gains And 10% Dividend Yield Suggests Motilal Oswal

Motilal Oswal in its recent report dated August 27, 2022 has recommended to buy Coal India. The Maharatna PSU firm is engaged in the production and sale of coal. It serves power and steel sectors, as well as cement, fertilizer, brick and kilns industries, among others. Brokerage firm is bullish on the scrip given its estimates of strong global demand for coal in CY22-23E.

Coal India- Buy| Target Price-Rs. 290

Target price set out for the scrip is Rs. 290 and at the current price of Rs. 229.65, this results in potential upside of over 26%.

Rationale for a 'Buy' on Coal India

-Strong demand foreseen for coal in Cy22-23E: Motilal Oswal in its report mentions "global coal demand is expected 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. Also, the brokerage iterates it view that with continued heat wave in China, the hydro electricity production should reduce further, therefore, increasing reliance on thermal coal.

Demand for domestic coal shall get a boost owing to thriving power demand in the country

The brokerage is of the view that as Europe continues to buy more South African coal, the port- based power plants in India will likely remain shut or operate at a lower rate, putting pressure on domestic coal-based power plants to ramp up

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 drastically with most of the coal being diverted to the power sector, e-auction reforms have brought all non-FSA buyers at one platform 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

The brokerage further clarifies that the wage hike of 15% together with a 5% attrition have already been accounted for in its Fy23 estimates. This as per the brokerage shall lead to a 10% total increase in wage bill,
thereby providing 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 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", states the brokerage.