Buy This Maharatna Stock For A Target Price of Rs. 225 Says Sharekhan

The world's largest coal producer is Coal India Ltd, a Maharatna Central Public Sector Enterprise (CPSE). The stock has gained by 20.86 percent in a year and is up by 17.13 percent year-to-date (YTD). The stock has climbed 17.66 percent in the previous six months and is currently trading at a market price of Rs 181.90 on the NSE as of March 11, 2022, 3:30 p.m. IST. Sharekhan has issued a buy recommendation on the stock, with a target price of Rs. 225.

Investment rationale for Coal India Ltd (CIL)

As per the brokerage "The recent sharp rally in international coal prices (Australian thermal coal/coking coal price at ~$200/~$420 per tonne) due to geopolitical tensions between Russia and Ukraine are expected to sustain as Russia is the largest coal export (accounts for ~19-20% of world thermal coal exports). Additionally, likely ban on coal exports (expected by April-August 2022) from Indonesia would further tighten the coal supply and support already elevated international coal price. This bodes well for an improvement in e-auction price (at 100% premium to notified coal price) and profitability of Coal India in the coming quarters."

Sharekhan has noted "Additionally, the government has approved offering of coal through a common e-auction window instead of sector-specific auctions and this would benefit Coal India's realisations going forward. We thus raise our e-auction premium assumption and increase our FY22E/FY23E/FY24E EPS by 3%/20%/3%. A potential hike in the FSA coal price (expected at 10-11%) would further drive profitability for CIL."

The brokerage claims "CIL's coal volume offtake grew strongly by 17% y-o-y to ~600 million tonnes in FY22YTD led by robust demand for domestic coal due to elevated imported coal price. Robust domestic coal demand makes us optimistic on achievement of management's FY2022 coal production/ offtake guidance of 630 mt/670 mt that implies an increase of 6%/17% y-o-y. Coal India's receivables has declined to ~Rs. 13,428 crore as on December 31, 2021 as compared to Rs. 19,623 crore as of March 2021 and the management targets to further reduce receivables below Rs13,000 crore by March 2022. This would improve cash position (stood at ~Rs. 29,138 crore as of December 2021) and help sustain a high dividend payout ratio (78% in FY21)."

Buy for a target price of Rs 225

"Improving earnings growth outlook (expect a 24% PAT CAGR over FY2021-FY2024E), high RoE of ~49%, and dividend yield of 13-14% make the stock's valuation attractive at 4.6x/4.8x its FY2023E/FY2024E EPS (close to trough levels). Potential efficient capital allocation for non-core investments (aluminium smelting and solar energy projects) could act as key catalysts for the stock. We maintain our Buy recommendation on CIL with a revised price target (PT) of Rs. 225 (reflects upwards revision in earnings estimates)," the brokerage says.

Disclaimer

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