This Stock Has An Upside Potential Of 57% from Current Levels

The stock of Coal India has an upside potential of almost 57 per cent, with attractive valuations and a solid dividend yield of 10 per cent, according to broking firm Motilal Oswal.

The firm has a target of Rs 192 on the stock, as against the current market price of Rs 122.

Valuations attractive; dividend yield of 10%

According to the broking firm, Coal India reflects the broad recovery in power demand (albeit aided by the low base of last year for the company).

"Off-take rose 9% YoY in 2Q (v/s 22% YoY decline in 1Q). Operationally, though, EBITDA (ex-OBR) declined 20% YoY (27% miss) due to higher contractual expenses amid strong OBR.

Muted power demand has impacted e-auction realizations and overall growth in off-take. However, with recovery in power demand and a large cash position, Coal India can tide over the situation. Maintain Buy, with target price of INR192/sh based on 4x Sep'21 EV/EBITDA," the broking firm has stated. The company has recently declared a dividend of Rs 7.5 per share.

Management commentary

According to Motilal Oswal, COAL's management noted the co.'s receivables stood at Rs 238 billion in Oct v/s Rs 233 billion in Sep, 2020. As per the management, money is being paid on incremental supplies. Post-Diwali, COAL would put pressure on the state govt. to recover its dues. The company would try to bring down receivables to near FY20 levels (160 billion) by end-FY21.

"COAL noted its subsidiaries have been asked to fix their own floor price from Oct for e-auction. COAL noted it has thus far booked 59mt of e-auction vols. in the current year v/s 31mt for the same period last year. It is hopeful of going beyond 100mt in terms of e-auction volumes for FY21," Motilal Oswal has said in its report.

Valuations attractive; maintain Buy

"E-auction realizations and volume growth have been under pressure on account of decline in power demand and significant stocks at both mines and power plants. However, power demand has shown signs of improvement, and we expect volumes to recover in 2HFY21.

Furthermore, we expect Coal India to tide over the current situation given the large cash position. The stock trades attractively at 1.5x FY22E EV/adj. EBITDA (v/s historical average of 7x), PE of 5x (v/s average of 13 times), and offers dividend yield of 10%. Maintain Buy, with target price of Rs 192/share, the broking firm has noted.

The stock of Coal India last traded at Rs 125.90 on the NSE.