ICICI Securities Recommended Buy This Maharatna PSU Stock, Shares Can Jump 28%

ICICI Securities maintains a buy call to Coal India Ltd (CIL) in its Equity Research report published on September 9. The brokerage has estimated a target price of Rs 294 apiece for the stock of the company. According to the brokerage's estimated target price, the stock is likely to gain 28% in 12 months if the stock is purchased at the current market price. CIL is a large cap Maharatna company engaged in mining sector. It has a market capitalization of Rs 1,41,835 Crore.

Stock Outlook

The current market price (CMP) of CIL's stock is Rs 230.90 apiece. The 52-week low of the stock is Rs 139.15 apiece, which was recorded on 20 December 2021 and the 52 week high is Rs 240.50 apiece, which was recorded on 08 September 2022, respectively.

Returns on Investment

The stock of CIL in the past 1 week fell 0.13%, whereas, in the past 1 month, it surged 4.35% and in the last 3 months, 16.52%, respectively. Over the past 1 year, it gave a return of 55.6%. In the past 3 years, the stock gave 17% positive return and in the past 5 years, it gave 10.19% negative return, respectively.

The brokerage hosted Coal India's Q1FY23 post result conference call on 8th Sep'22. Following are the key takeaways from the call:

Pressure to increase production

CIL is facing pressure to increase its production on the back of demand increase and reduction in generation by imported coal-based plants. Further, CPPs have also stopped importing coal and generating power and such industries are now procuring power from the grid. This may result in an increase in the eauction prices. CIL has maintained its 700mnte production target for FY23.

E-auction realisation and volumes

In Q1FY23, e-auction realisation was Rs4,340/te with sale of 20.9mnte of volumes. The management expects e-auction volume trend of 20-25mnte per quarter to continue and end FY23 with 80-90mnte. Further, current eauction price of ~Rs4,500/te (>300% premium on FSA) is also likely to continue at similar levels over FY23. Currently, inventory at power plants stands at 28-29mnte, which is substantially higher than the levels during the same period last year. This will help the company auction out more volumes to the non-power segment and hence, improve the e-auction volumes in the coming months.

 

Wage provisioning

CIL had made provision of Rs9bn in FY22 for the impending wage increase. In FY23, it is currently providing Rs1bn/month and may increase it to Rs1.5bn Q3FY23 onwards. Since wage negotiations are still ongoing, the quantum of impact is difficult to predict. Employee retirements will also help reduce the impact on employee cost, as the company expects ~13,000 net reduction in the employee strength in FY23. Contractual labour price is also linked to the wages, so there may be some impact on contractual expenses.

 

On 1bnte production target by FY25

In order to reach this target, CIL will need to increase production to 840mnte in FY24. However, realistically, by FY25, the company may reach >900mte and 1bnte by FY26. CIL has awarded MDO contract for >100mnte which will produce coal by FY24/25. It has received EC for 64mnte in 5MFY23. There are certain issues with FC, but the company has made some progress. On the land acquisition front, in FY23, CIL is targeting a similar quantum as done in FY22(~3,000ha).

Receivables to reduce going forward

Receivables increased from Rs110bn to Rs140bn at Q1FY23-end, but has declined slightly to Rs130bn currently. CIL had to ensure supplies and adequate stocking of coal at thermal plants in order to be ready for the rainy season. The company will control the receivables Oct'22 onwards.

Capex target is Rs165bn for FY23

The 35 FMC projects require large investments. Phase-2 of FMC project implementation includes nine more projects and related rail infra. Further, land acquisition has to be done continuously. Unless this investment is done, future production growth may suffer.

 

Progress on railway lines

Tori-Shivpuri third line is in progress and will be completed in CY23. Shivpur-Kathautia will be commissioned by CY24. For Jharsuguda-Sardega line, doubling is likely to be completed by Mar'23, flyover by CY24 and coal loading bulb will take two years to complete. Angul-Balram rail link is expected to complete by Oct'22.

Coking coal production

It is difficult to become self-sufficient in coking coal with present technology. While ash content can be reduced with washing, hardness cannot be reduced. Through the stamp charging process, 25-30% of the total requirement can be provided domestically (mainly used by blending). CIL's FY23 coking coal production target is 40mnte (only G1-G4 grade coal is washed and used). Usable coal can be increased in case the steel plants wash the coal themselves.

Solar power

CIL targets to become an energy-neutral company in the next 2-3 years. While the company's threshold IRR for any investment is 12%, for solar this may be a bit lower as well. 450MW of upcoming solar capacity will be mainly for captive consumption, and have high IRRs.

Alumina project

CIL will not invest in the project if it does not receive bauxite mines on nomination basis and the project IRR is not >12%. The project continues to be under consideration.

 

Coal compensation cess

The cess is not applicable only in case of captive consumption or consumption within the same state. This cess is expected to continue up to FY26.

Update on fertiliser projects

Talcher Fertiliser project is facing delays of 18 months due to covid and few other issues. In case of HURL, Gorakhpur unit has already been commissioned while the other two units at Sindri and Barauni are expected to operationalise soon.

Higher FSA realisation in Q1FY23

FSA realisation is higher due to grade realisation and higher purchase by consumers from BCCL and ECL, where prices are costlier compared to that sold by other subsidiaries.

 

Washeries

There are no purchasers for non-coking washed coal. One washery for coking coal may be operationalised next year. Washed coking coal production may increase by 70-80% YoY in FY23.

Price hikes

After posting good profit numbers over the past two quarters, the company is in a better position in terms of absorbing cost increases. Also, inflationary pressures have moderated slightly. Still, CIL is working with stakeholders and is expecting to at least get the wage hikes and increase in production input costs to be factored into the FSA prices going forward.

 

SECL production issues

Subsidiary had issues in its three major mines. However, it has been able to solve the problems in Kusmunda and Gevra mine areas and is trying to solve the problems at Dipika mine areas. Further, despatches and overburden removal have improved; however, rains have hampered further improvement in production, which the management expects to reverse post monsoons from October.

Coal gasification

This is a new technology. CIL has floated tenders on BOOM basis as it does not want to take technology risks. However, the responses have been modest and the company is trying to modify the tenders to attract more interest. It is difficult to ascertain currently who will be the technology partners. CIL is trying to tie up with few PSUs to ensure offtake. While it is difficult to predict timelines, it may float tenders in the next 7-8 months.

MDO contracts

MDO contract depends on stripping ratio among other factors. Excavation cost through MDO is 10-15% higher as the capital investment in higher, while coal production cost is comparable for some mines and slightly higher (10-15%) for others. However, the targets are achieved earlier and the quantum of actual production is similar to the target. Cost of production through MDO in underground mines is lower. MDO for two large mines (130-140mnte of production) may be awarded in FY23. Contractual cost per tonne has not increased in Q2FY23 over Q1FY23 as diesel prices have not changed substantially.

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 making any investment decision.