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Buy This Maharatna Stock For 51% Return In 1-Year: ICICI Securities

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The brokerage firm ICICI Securities has assigned a buy rating to Coal India Ltd's stock. From its current market price of Rs. 154 as of 5 Jan, 3:30 pm IST, the brokerage has set a target price of Rs. 234 and expects the stock to increase 51.94 percent in a year.

 

The brokerage’s take on Coal India Ltd (CIL)
 

The brokerage’s take on Coal India Ltd (CIL)

ICICI Securities in its latest research report has said that "During 9MFY22, CIL's production was 413.6mnte, up 5.3% YoY, while offtake was 481.8mnte, up 17.6% YoY (up 15.4% vs 9MFY20), an all-time high for the period. In Dec'21, production was 60.2mnte, up 3.3% YoY, while offtake was 60.7mnte, up 15.7% YoY (up 13.2% vs Dec'19) and averaging 1.96mtpd, while in Q3FY22, production was 164mnte, up 4.5% YoY, while offtake was 174mnte, up 12.8% YoY (up 23% vs Q3FY20). CY21 offtake was 646mnte. This performance was despite heavy rains in mining areas in the eastern region, which impacted both production and offtake in Oct'21. Coal inventory at power plants has improved but still remains low at 9 days (23.5mnte) as of Dec'21-end (from 4 days in early Oct'21). Low coal inventory at plants, higher power demand and elevated international coal prices are expected to help CIL post strong volumes in Q4FY22 as well, similar to Q4FY21 (164mnte)."

According to the brokerage "After touching all-time highs in Oct'21 mainly due to shortage in Chinese production, and the resultant 76% surge in Chinese imports in Sep'21 to 33mnte, international coal prices have now declined to almost half, but remain elevated. China continues to be the largest importer (292mnte in 11MCY21, up 10.6% YoY), due to lower domestic production. However, the recent ban imposed by the Indonesian government on the export of coal in Jan'22 to cater its higher domestic demand (decision to be reviewed on 5th Jan'22), may again result in global coal shortages. Further, demand for coal is higher in most major coal importing countries, including Japan and S. Korea, due to higher economic activities. Thus, the ongoing global coal demand-supply dynamics indicate a rise in prices over the next few weeks. At Nov'21-end, prices of Australian (6,000KCal/kg) / S. African (6,000Kcal/kg) / Indonesian coal (5,900Kcal/kg) were US$134 / US$170 / US$131 per tonne, respectively."

The brokerage has highlighted that "As has been indicated by the CIL management, the price hike is imminent to offset increasing costs, particularly fuel cost and wage revision, though the quantum and timing of the hike continues to be under evaluation. In the past five years, price hikes were taken in: 1) Jan'18 when CIL rationalised noncoking coal prices, and 2) in May'16 when the company raised prices by 6.29%. Already, w.e.f. 1st Aug'21, CIL has subsumed the rapid loading charges with evacuation facility charges and standardised it at Rs60/te, which we estimate will result in an earnings increase of ~Rs5bn in FY22E and >Rs8.5bn p.a. FY23E onwards. Restocking and import substitution are expected to take domestic coal supplies to 750-800mnte in FY22E (691mnte in FY21)."

According to ICICI Securities "While the offtake has clocked new highs, production continues to lag behind. Key reasons behind lower production include land acquisition and evacuation issues. While the latter is expected to be addressed by the several ongoing FMC and railway projects, slowdown in land acquisition may become a major concern. We don't expect any issues for CIL for up to 700mtpa of production. However, if production has to be raised >700mtpa, these challenges will have to be addressed."

The brokerage has also added in its report that "Focus on domestic coal supplies continues to cater to the power sector demand. In 8MFY22, 81% and 83% of the total supplies for CIL and SCCL respectively have been to the power sector. E-auction sale was temporarily reduced in Oct'21, but volumes returned to normalcy in Nov'21 at 13.3mnte, with a weighted average premium at 81%. We expect CIL's FY22E e-auction sales volumes to be similar to FY21 at 90-100mnte. However, the H2FY22 premium is expected to be higher YoY due to high demand from NRS and imported coal substitution. CIL has already paid an interim dividend of Rs9/share for FY22, which is a 91% payout of H1FY22 earnings of Rs9.9/share. Aided by good offtake performance, we estimate FY22E earnings at Rs25.8/share, and we expect the company to payout >70% during the year translating to Rs20/sh. Going forward, CIL can pay Rs20-25/share dividend annually taking the yield to ~15%."

Buy With A Target Price of Rs. 234 Says ICICI Securities

Buy With A Target Price of Rs. 234 Says ICICI Securities

The brokerage in its research report has said on 4.01.2022 that "Coal India's (CIL) Q3FY22 offtake volumes at 174mnte (up 12.8% YoY) took 9MFY22 volumes to 481.8mnte, up 17.6% YoY (up 15.4% vs 9MFY20), at an all-time high. Key factors behind the surge in offtake volumes were: 1) Higher power demand; 2) low coal stocks at most power plants; 3) unprecedented power prices on exchanges in Oct'21, 4) elevated global coal prices, forcing Indian importers to look for domestic alternatives, 5) RE generation still some way off from becoming a substitute for coal, especially during non-solar hours of the day. If CIL ends FY22E with 15% YoY growth, it will reach its annual offtake target of 660mnte, higher than consensus and our own conservative estimate of 625mnte."

ICICI Securities has further claimed that "On the global front, demand remains high but supply is uncertain as Indonesia has banned exports in Jan'22. This may result in global coal prices increasing again in the next few weeks, from already elevated positions. This is likely to make CIL a preferred coal supplier for domestic consumers in the medium term as it remains at ~50% discount to international prices. We retain our BUY rating on CIL and DCF-based target price of Rs234. We remain conservative on the stock with our FY22E volume estimate of 625mnte and have not yet incorporated any impact of price hikes in our estimates. The stock is currently trading at 5.2x P/E and 2.7x EV/EBITDA on FY23E basis with 40% RoE."

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

Story first published: Wednesday, January 5, 2022, 16:36 [IST]
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