6.23% Dividend Yield: Coal India Is Axis Securities Pick Of Week, Target Price At Rs 430; 3 Reasons Why!

Pick Of The Week: The World's largest government-backed coal producer, Coal India is the pick of the current trading week from January 29 to February 2. Brokerage Axis Securities finds Coal India attractive for buying this week owing to its demonstration of a healthy production run rate, and measures to achieve targets. Apart from this, the company's e-auction premium is seen to be stabilising and coal-based power demand offers visibility.

In its pick of the week report, Axis Securities said, "CIL has demonstrated a good production run rate so far. It is implementing several measures to support its production targets, including i) using the MDO model (Mine Developer Operators) for greenfield and brownfield mines, ii) implementing FMC (First Mile connectivity) projects for evacuation efficiency, and iii) employing the latest technology for faster evacuation and transport, along with a focus on exploration."

Further, the brokerage's note said, "We value the stock at 4.5x 1-year forward EV/EBITDA multiple on FY26E Adj. EBITDA (Rollover from FY25E) and arrive at our target price of Rs 430/share (from Rs 380/share), implying an upside of 10% from the CMP."

The latest target price of Axis Securities means Coal India has a potential of over 10% upside in the near term. On January 25, last week, the stock price finished at Rs 389.50 apiece, up by 1.8% on BSE with a market cap of Rs 2,40,038.27 crore.

It also needs to be noted that Axis Securities' target price will be Coal India's new record high. Currently, the stock has a 52-week high and low of Rs 404.80 apiece and Rs 207.70 apiece respectively.

Giving buy, Axis Securities highlighted three key main investment rationale for Coal India. They are:

1. Delivering robust production and off-take:

CIL production in FYTD till Dec'23 stood at 532 MT, up 11% YoY. CIL needs another 11% YoY growth in Q4FY24 to achieve its target of 780 MT production for FY24. Coal offtake for 9MFY24 stood at 552 MT, up 9% YoY, and it will require a steeper 22% increase in Q4FY24 to reach the 780 MT offtake target for FY24.

Axis Securities model coal offtake at 760 MT, which implies a run rate of 9% growth YoY. CIL has ambitious coal supply targets of 850/1,000 MT for each year over FY25-26E.

2. E-auction premium stabilizing:

With the drop in international coal prices, the e-auction premium had fallen to 54% in Jun'23, rebounding to 118% in Oct'23, and standing at 83% in Nov'23 and 62% in Dec'23. FYTD'24 e-auction premium has stood at ~86%.

The brokerage has modelled e-auction volumes of 76/82/91 MT over FY24-26E, which is approximately 10% of our offtake volume estimates of 760/820/881 MT over FY24-26E.

3. Coal-based Power demand offers demand visibility:

As per the National Electricity Plan (NEP) for 2022-32, the domestic coal requirement is estimated at 866 MT for FY27 and 1,026 MT for FY32. The coal requirement has been calculated assuming a 20% reduction in Hydro, Nuclear, and Variable Renewable Energy (VRE) generation due to uncertainty. The increasing usage of thermal power provides demand visibility for coal in the future.

Incorporated in 1975, Coal India is the largest coal producer in the world. The government of India (GOI) conferred the Maharatna status on CIL in April 2011, providing the company with operational and financial autonomy. As of March 2023, CIL operates 322 mines, comprising 138 underground, 171 opencast, and 13 mixed mines.

It also needs to be noted that Coal India is the highest dividend yield stock in PSU stocks. At the current market price, Coal India has a dividend yield of 6.23%. In 2023, the company paid dividends to the tune of 245% aggregating to Rs 24.5 per share.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.