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Buy This Maharatna Stock For A Target Price of Rs. 220: Motilal Oswal

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Coal India Limited (CIL) is a Maharatna-rated Indian government-owned coal mining and refining company. Following the corporation's offer to reopen 20 previously closed mines in conjunction with the private sector, brokerage company Motilal Oswal has placed the stock with a buy call rating with a target price of Rs 220, representing a potential 29 per cent upside from the current market price of Rs 170.

 

Investment rationale
 

Investment rationale

The brokerage has said in its latest report that "COAL has offered to re-open 20 previously closed/abandoned mines in partnership with the private sector. The methodology is the same as commercial mining. The mines will be auctioned on a revenue sharing basis. The highest bidder can mine using green mining technology and can sell the coal at market prices under a transparent mechanism. Related-party transactions are not allowed.

"The objective is to offer mines that are not commercially viable for COAL, but can be mined by the private sector. This will help reduce the coal deficit in India, which as per the Ministry of Coal is currently pegged ~25MT. If successful, COAL will offer an additional 100 mines," the brokerage has further added.

Motilal Oswal has also said that "The entire process will take time as the bidders will have to evaluate the current situation at the mines as some have been closed a decade ago. Hence, the immediate response should be measured. The bidding is unlikely to be aggressive as these are underground mines, with a small annual output. The investment and timeframe for mining is yet to be ascertained with reasonable certainty."

"Coal, as a commodity, is again in focus due to the Russia-Ukraine war and the impact on supplies of thermal coal from Russia. Also, a decision by Europe to structurally shift from natural gas supplied by Russia to other renewable sources, and increased dependence on coal during this transition has led to a massive spike in coal prices in our view," claimed the brokerage.

Buy for a target price of INR220 per share

Buy for a target price of INR220 per share

Motilal Oswal has said that "COAL is currently trading at 2.9x our FY23E EV/EBITDA. At the CMP, we expect 12% dividend yield each for both FY23 and FY24, building in a FY23/24 DPS of INR21.1/INR20.7. Coal prices are likely to remain elevated over the next 12-24 months till Europe completely migrates away from Russian NG to renewable sources. Till then, its reliance on coal will increase substantially. With domestic power demand rising substantially owing to an overall pick up in the economy, we expect a ramp-up in COAL's mining volumes."

According to the brokerage "However, we do not expect revenue from e-auction to be meaningfully higher compared to FY19 or FY20 levels as the coal available for e-auction will be limited (though the premiums will rise, given that multiple auctions are now combined into a single auction), and international coal prices are expected to remain high for the next two years. The reforms in the Coal sector will bring in more players, but that does not diminish COAL's stature as the largest coal mining company globally. It will also not impact its profitability as FSA coal is priced at a significant discount to the international coal prices, even after accounting for the differential in the energy and ash content."

"The current scheme is value accretive to COAL as it will only add to the profitability of COAL without any incremental costs. Hence, any incremental revenue in this scheme for COAL will flow straight into PBT. We continue to maintain our BUY rating on COAL with a TP of INR220, based on 4x FY23E EV/EBITDA," Motilal Oswal has said in a report.

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. 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. Goodreturns.in advises users to check with certified experts before taking any investment decisions.

Read more about: stocks to buy
Story first published: Wednesday, May 11, 2022, 16:02 [IST]
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