Coal India Share: Why Brokerages Motilal Oswal, Sharekhan Suggest Buying This Top PSU Dividend Yield Stock?

The highest PSU dividend yield stock, Coal India is in the limelight for its strong volume growth and robust demand. Leading brokerages Motilal Oswal and Sharekhan are the latest to recommend buying this largest government-backed coal producer in the world for a target price of Rs 430 to Rs 440 per share. This would imply a potential upside ranging from 14% to 17% in Coal India ahead.

On BSE, Coal India's share price stood at Rs 375.95 apiece, down by 1.29% on December 29. However, the stock also hit a new 52-week high of Rs 382.85 apiece on the last day of 2023 before correcting. Currently, its market cap is around Rs 2,31,687.77 crore.

Coal India shares have gained by over 67% in 2023, outperforming benchmarks Sensex and Nifty 50.

Here's what brokerages Motilal Oswal and Sharekhan highlight about Coal India:

Motilal Oswal Sets TP of Rs 430 On Coal India:

As per the brokerage, to meet the increasing demand for coal in the power sector amid the government's strong push to ensure a reliable 24x7 electricity supply, Coal India (COAL) has made a long-term commitment through FSA agreements. Based on YTD performance, COAL is targeting a production of 780mt in FY24 (MOFSL estimate of 751mt) and 850mt in FY25 (MOFSL estimate of 821mt).

Further, it added that COAL has intensified its focus on capex that will improve its evacuation infrastructure. Capex, which used to hover around INR65-85b until FY20, tripled in FY23 to INR186b. Over the last three years, capex has exceeded budget estimates. COAL has earmarked ~INR165b capex in FY24E, which will help the company develop infrastructure across numerous verticals such as railway corridors, land acquisitions, HEMM procurement, setting up CHPs, etc. COAL has already incurred a capex of ~INR105b during Apr-Nov'23 (up 7.6% YoY); its FY24 yearly capex is expected to surpass the budgeted target.

On the valuation, the brokerage said, "COAL trades at an EV/Adj. EBITDA of 4.2x FY26E. We roll forward our estimates to FY26. We reiterate our BUY rating on the stock with a TP of INR430 (premised on 5x FY26E EV/EBITDA). We believe COAL is well placed to capitalize on the growth opportunity ahead."

Sharekhan Sets TP Of Rs 440 On Coal India:

Sharekhan's research note pointed out that Coal India's target to grow coal production at a 12% CAGR over FY2023-FY2026E, higher e-auction premium, and focus on cost-control provides confidence in sustained strong earnings growth outlook. The capex plan is expected to continuously enhance coal evacuation infrastructure and focus on first-mile connectivity projects would be important to achieve 1bt of coal production by FY2026.

Notably, Coal India has a target of 780mt/850mt of coal production for FY2024/FY2025 and aims for 1,000mt by FY2026, which means that it has a strong coal production CAGR outlook of 12% over FY2023- FY2026E. Also, the company does not see any material volume offtake risk as it expects domestic coal demand to remain robust till 2030.

Moreover, the brokerage also said that the recent surge in international coal prices and strong demand from the power/non-power sector have supported the sharp recovery in e-auction premium to 80-100% as compared to softness (58% e-auction premium) seen in July 2023. Higher e-auction premium and higher volume growth from NPS bode well for blended coal realisation. This coupled with cost-control initiatives (lower employee count by 5% annually and closure of non-profitable underground mines) would drive margin improvement for CIL.

Moreover, on the valuation, Sharekhan's note said, "Despite a sharp run-up of 69% in CIL's stock price in CY2023YTD, its valuation of 8x/7x its FY2025E/FY2026E EPS is attractive and the stock offers a high dividend yield of 8-9%. The board has given in-principle approval to divest a 25% stake in Bharat Coking Coal Limited (BCCL) and a stake sale along with a potential listing could help unlock value. We maintain Buy with a revised price target (PT) of Rs. 440 (an increase in PT reflects a higher P/E multiple as a strong coal demand outlook provides earnings growth visibility)."

The government-backed PSU giant is also focused on diversifying towards renewable energy (RE) and plans to set up 3GW (250 MW expected to be completed by FY2024-end) of solar energy capacity at an estimated capex of Rs 15,000 crore by FY2026.

In 2023, Coal India paid dividends up to 245% amounting to Rs 24.5 per share. Currently, it has a dividend yield of 6.45%, which is one of the highest among PSU stocks.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.