Axis Securities Bets On This Maharatna Stock For 23% Gains, Grew By 4% YoY In FY22

Axis Securities recommended buy rating to Coal India for a target price of Rs 225/share for 12-month investment period. Coal India is the largest coal producer in the world and accounts for ~80% of the domestic coal production in FY22. It has strategic importance in meeting India's energy requirement as ~51% (as of May'22) of the country's power generation capacity is derived from coal-based thermal power plants. Coal India's coal production grew by 4% YoY in FY22 to 623 million tonnes (MT), while dispatch rose by 15% YoY to 662 MT.

Stock Outlook

Today, Coal India Ltd's opened at Rs 188.10/share, the Current Market Price (CMP) is Rs 263.30/share. The CMP is nearly Rs 51.55/share above the 52-week low of Rs 132.75/share recorded on 23 August 2021. While its CMP is roughly Rs 24.7 below the 52-week high of Rs 209 per share level recorded on 20 May 2022. According to the CMP and the brokerage set Target price of Rs 335/share, the stock could jump nearly 23% in 12 months.

Looking at its performance over the years, it has not performed well in the last 5 years. It moved down nearly 27.68% in 3 years and 24.85% in 5 years. In the last 1 year, it has a positive return of 25.16%, and 0.36% in 3 months.

Robust business profile with stable and healthy operating margins

The company's EBITDA margins have been healthy and stable averaging 25% over the last decade. This has been on account of abundant coal resources, conducive geological conditions, the company's improving productivity in terms of output/man-shift due to manpower reduction through the closure of underground mines, higher outsourcing, and Capex on open cast mines and evacuation expenditure. However, the margins dipped in FY18 (14%) as it undertook one-time expenses on provisions towards wage revision and higher production costs (led by grade slippage). Wage revisions are due now and the company expects them to complete by the end of FY23. Keeping this in view, we model a 10% increase in the employee cost along with a 6% hike in blended average sales prices (ASP) to factor in higher e-auction prices and an expected hike in FSA prices (option value).

Higher international coal prices lead to Higher e-auction coal prices

Higher international coal prices driven by heightened geopolitical tension and supply chain disruptions have led to lower imports and higher e-auction premiums for domestic coal. In Q4FY22, CIL's e-auction premium over FSA coal stood at 65% vs. 42% in Q3FY22 and 26% in Q4FY21. The e-auction volumes, however, stood stable at 28MT in Q4FY22 vs. 26MT in Q3FY22 and 29MT in Q4FY21 mainly due to higher demand for FSA coal by the Power sector. We believe the merger of 5 different e-auction coal windows into a single window would lead to uniform pricing for similar grades of coal. In May'22, the e-auction premium surged to 425% over notified prices. However, e-auction volume stood low at 4.38MT. With the onset of monsoon, we expect peak power demand to subside and higher e-auction volumes to NRS (non-regulated sectors such as steel and cement) as their demand will continue to remain stable.

Strong cash flows to keep the dividend yield high

Coal India Ltd has a robust financial risk profile with healthy net cash and cash equivalents of Rs 25,870 Cr (as of Mar'22). Trade receivables have come down to Rs 11,368 Cr in FY22 from Rs 19,623 Cr in FY21 leading to positive free cash flow in FY22 (post working capital changes). The company has a Capex plan of Rs 17,000 Cr for FY23, primarily on evacuation infrastructure. Despite the proposed Capex and high dividend payout, liquidity will remain robust over the medium term, backed by a robust capital structure and healthy cash accrual. At CMP, the current dividend yield remains attractive at 11%.

Axis Securities Recommends buy for Target price of Rs 225/share

The brokerage said, "We initiate coverage on the stock with a BUY rating and value the company by assigning a 1- year forward EV/EBITDA multiple of 4.0x on FY24 EBITDA. We arrive at our Mar'23 target price of Rs 225/share, implying an upside of 21% from the CMP. At CMP, the stock is trading at 3.4x on FY24E EV/Adj EBITDA which looks attractive and offers an impressive dividend yield of 10% on FY24 Earnings."

About - Coal India Ltd.

Coal India Ltd (CIL) is a 'Maharatna' Public Sector Undertaking under the Ministry of Coal Government of India with headquarters at Kolkata West Bengal. Coal India Limited (CIL) the state-owned coal mining corporate came into being in November 1975. With a modest production of 79 Million Tonnes (MTs) at the year of its inception Coal India Ltd, today is the single largest coal producer in the world and one of the largest corporate employers with manpower of 272445 (as on 1st April, 2020). CIL functions through its subsidiaries in 84 mining areas spread over eight (8) states of India. Coal India Limited has 352 mines (as on 1st April, 2020) of which 158 are underground, 174 opencast and 20 mixed mines. Coil India Ltd further operates 12 coal washeries, (10 coking coal and 2 non-coking coal) and also manages other establishments like workshops, hospitals, and so on.

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.