Buy This Maharatna Stock For A Target Price of Rs. 225: HDFC Securities

Q3FY22 Result of Coal India As Per HDFC Securities

• CIL reported strong performance in Q3FY22, despite heavy rains in mining areas in the eastern region, which impacted both production and offtake in Oct'21; consolidated total income from operations grew by 20% YoY to Rs 28,434 crore led by all-time high offtake volume in the quarter. Net Profit grew by 47.8% YoY to Rs 4558 crore in Q3FY22.
• CIL Q3FY22 volume offtake was up by 12.8% YoY at 174 mnt and reported 9MFY22 volumes at 481.8mnt, up 17.6% YoY (up 15.4% vs 9MFY20), at an all-time high. CIL's production was up by 4.5% at 163.9 mnt and it increased 5.3% YoY at 413.6mnt in 9MFY22.
• Low coal inventory at plants, higher power demand and elevated international coal prices could to help CIL post strong volumes in Q4FY22. We expect profitability to recover further in Q4FY22, led by strong e-auction premiums, which breached the 100% mark after 12 quarters in Jan-Feb'21.

 

HDFC Securities’ Take On Coal India

According to the brokerage "The import of coal into India could reduce further in the coming months as new coal mines and captive mines have started their production. All efforts are on to further enhance domestic coal production as availability of additional coal will aid in import-substitution of coal. The import of Non Coking coal, primarily used in power sector has decreased by 59.20% from 52.49 MT to 21.41 MT up to Dec 2021 in comparison to the same period of FY20. Reduction of coal import could bring the demand momentum in near to medium term and being the largest producer, CIL could be one of the key beneficiaries. Apart from this, recently Indonesian government banned export of coal in Jan 2022 to cater its higher domestic demand; this could bring the situation of global coal shortages."

"At the same time, due to stable economic activities, demand for coal is higher in most major coal importing countries, including Japan and S. Korea. Thus, the ongoing global coal demand-supply dynamics could help to coal price rise over the next few weeks. The government's plans to increase coal production to substitute imports, (that stood at more than 200 MT) could help CIL to register sustainable volume growth over the next couple of years. Moreover, cost control initiatives such as reduction of manpower (employee cost accounts for 53-54% of overall cost) could expand margins. CIL last raised prices in FY18. We expect, CIL to announce a price hike, which could cover the increased wage bill and leave room for margin expansion. We expect, due to higher fuel cost and wage revision, the company could take a call to price hike in the near to medium term," said HDFC Securities.

Buy for a target price of Rs. 225

"Coal remains a primary source for energy in India and demand for coal is likely to grow over the next few years as economy is likely to grow. Reliance on continuous power based on thermal power, could keep demand for coal buoyant at least for the next decade. CIL is in a comfortable position to meet India's growing demand, as number of CIL projects are in the development stage and likely to start delivering in the next two-to-three years," as per the brokerage.

"CIL enjoys monopolistic status, healthy profitability, higher dividend payout and strong financial profile. These strengths are partially offset by susceptibility to regulatory risks and socio-political factors, and constraints in the coal distribution and evacuation infrastructure in India. Despite its near-monopoly status, the company's stock has declined by around 58 per cent from its listing price on an absolute basis, making it one of India's worst-performing large-cap stocks. Despite, the dismal performance, the stock might prove to be a good cyclical play," the brokerage has noted.

"Investors could buy in the Rs 181-185 band and add more on dips in the Rs. 162-166 (4.75x FY24E EPS). Base case fair value of the stock is Rs 208 (6x FY24E EPS) and the bull case fair value of the stock is Rs 225 (6.5x FY24E EPS) over the next 2 quarters. At the CMP of Rs 183 the stock trades at 5.3x FY24E EPS," HDFC Securities has stated.

Disclaimer

The stock has been picked from the brokerage report of HDFC 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.