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ICICI Securities Given Buy Call To This Maharatna Stock For Over 40% Potential Gains

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ICICI Securities has given a buy rating to Coal India, a Maharatna Company, for a target price of Rs 258/share. Coal India continues to clock strong operational numbers, buoyed by high domestic coal demand and continued elevated international coal prices. In Q1FY23, production / offtake was 159.8mnte / 177.6mnte, up 28.9%/10.7% YoY, respectively. Production has increased by a record 35.8mnte YoY in Q1FY23, higher than the YoY increase in the entire FY22 (26.4mnte).

 

Stock Outlook

Stock Outlook

 

On July 04, the shares of the company declined 0.65%, ends at the Current Market Price (CMP) of Rs 182.05. It was opened at Rs 183.25/share. The stock touched the 52-week low at Rs 132.75/share on 23 August 2021, and the 52-week high at Rs 209/share on 22 April 2022.

If investors buy the stocks of Coal India at the CMP, they can expect potential gains of 41%, considering the estimated target price of Rs 258/share by the brokerage.

Over the last 1 year on equity investment, the stock has given positive returns of 23.3%, however, on long-term investment of 5 years, it has given negative returns of 26.22%.

Stock Details 
CMPRs 182.05
Target PriceRs 258
Potential Gains41.00%
52 week lowRs 132.75
52 Week HighRs 209
1-Year Return-23.30%
5-Years Returns26.22%.
Q1FY23 operational performance
 

Q1FY23 operational performance

For Q1FY23, production / offtake was 159.8mnte / 177.6mnte, up 28.9% / 10.7% YoY. Production has increased by a record 35.8mnte YoY in Q1FY23, higher than the YoY increase in the entire FY22 (26.4mnte). For the remaining 9 months of FY23, the growth rate now required to reach 700mnte of production is only 8.3%, from 12.4% earlier. Coal India has been able to liquidate 17.8mnte of coal stocks, which stood at ~43mnte at Jun'22-end. Coal India supplied 153.2mnte to the power sector during Q1FY23, up 19.8% YoY (increase of 25.3mnte YoY). Daily average supply was 1.684mnte in Q1FY22, and was 1.713mnte in Jun'22. This is positive, and the company is making all efforts to ensure adequate coal availability to power and non-power sectors.

E-auction update: Single window auctions have started since March'22 and the premiums have significantly increased thereafter. In Apr'22 / May'22, only 1.6mnte / 4.4mnte of coal had been auctioned and average premiums were 345% / 398% (weighted average premium is 384% for 2MFY23). E-auction volumes are expected to pick up in the coming months as power plants restock.

Strong operational Q1FY23 performance indicates a better FY23

Strong operational Q1FY23 performance indicates a better FY23

With daily power demand consistently crossing 200GW and expected to increase further, as well as continued high international coal prices, we expect dependence on domestic coal to remain strong and e-auction premiums to remain elevated in FY23. This is likely to result in a better FY23, both in terms of volumes and prices. Coal India expects e-auction volumes at ~100mnte at high premiums in FY23. Additionally, any FSA price hike will boost earnings, and cut in diesel prices during the quarter by the central as well as several state governments is expected to ease costs and improve profitability further.

Coal India floats multiple coal import tenders

Coal India floats multiple coal import tenders

According to the brokerage, "In a first for the company, Coal India has floated three international competitive bidding e-tenders for the import of coal. Government of India has nominated Coal India as a centralised agency to augment coal supplies to state gencos and IPPs through the import of coal, as demand for coal continues to remain high. We expect Coal India to earn a margin of up to 5% of the import value."

Details of the tenders are given below:

  1. The first tender is for the import of 2.416mnte of 5,000 GAR thermal grade coal for the Jul-Sep'22 period. The coal can be sourced from any country and the quantity has been finalised as per the requisition from 7 state gencos and 19 IPPs. CIL has finalised 9 ports through which the coal received will be routed, and the successful agency will be required to deliver coal at the doorstep of the power plants of state gencos and IPPs.
  2. Immediately after the above tender, CIL floated two more tenders for the import of 3mnte of coal each on medium-term basis, with an option of increasing the total bid quantity to 12mnte. These two tenders have been floated in order to assure future supplies on immediate basis as and when a requisition is placed by the state gencos / IPPs, and are not on indent basis. The tenure for order placement is from Jul'22 to Jun'23. The minimum indent quantity will be 50,000 tonnes. Orders will be placed to ship the coal into the country and supply at the doorstep of the plant as and when indented by the state gencos / IPPs. Coal India estimates the value at Rs 38.5bn for each tranche of 3mnte supply of coal.
FY22 performance has provided a strong base for growth

FY22 performance has provided a strong base for growth

In FY22, FSA / eauction volumes increased 15.8%/17.4% YoY at 540.2mnte/110.8mnte, as focus was on higher supply to power sector. This resulted in 14.9% growth in the total offtake at 662mnte, a growth of 87.4mnte in volume terms. Coal India's coking coal production increased 20% YoY to 46.6mnte in FY22. FSA realisation at Rs1,407/te was 2% higher YoY, while e-auction realisation was up 19.8% YoY at Rs1,880/te. This resulted in average realisation of Rs1,520/te vs Rs1,440/te in FY21, an increase of 5.6%. Although costs also increased in FY22, EBITDA per tonne increased to Rs430 vs Rs349 in FY21, resulting in 36.8% YoY increase in EPS to Rs28.2. Coal India now has a much healthier balance sheet with debtors at Rs114bn vs Rs196bn at FY21-end and cash and liquid investments increased to Rs365bn vs Rs209bn at FY21-end. Continued higher demand for domestic coal due to high thermal power PLFs and elevated international coal prices resulting in high e-auction premiums, combined with lower cost pressures, may result in Coal India clocking a better FY23.

Ministry of Coal's action plan for FY23

Ministry of Coal's action plan for FY23

In its action plan for FY23, the coal ministry has set a 15-point agenda for undertaking its reforms in the sector and strategising for the future. It has also launched Coking Coal Mission for enhancing the production of coking coal from 45mnte in FY21 to 140mnte by FY30, including 105mnte from Coal India.

Valuation

ICICI Securities has said, "We maintain our BUY rating and our DCF-based target price of Rs258 on the stock. Coal India is currently trading at 5.5x P/E and 2.5x EV/EBITDA on FY24E basis with 35.6% RoE. We expect dividend payout to remain high, leading to 10-12% yield at CMP, despite heavy capex."

Disclaimer

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

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