Motilal Oswal Sets 46% Upside Target On Shares Of Coal India

Brokerage firm Motilal Oswal has placed a "buy" call on the stock of Coal India with a price target that is almost 46 per cent higher from current levels. Here is a quick synopsis from the Motilal Oswal report.
Near-term focus on OBR with scale down in production

COAL India has reduced production given the build-up in inventories at its own mines and power plants. In turn, the company is focusing on OBR (overburden removal), which should help it improve production. OBR has increased 15% over the past two months.

Dispatches for COAL India have increased over the past one week, even as power demand recovers and factories restart operations. As demand continues to recover and given the current focus on over burden removal, the company believes it would be in a better position to ramp up production.

Substituting imported coal

Of the 170-180 metric tonnes imported thermal coal in India, COAL India plans to substitute 100 metric tonnes, thereby looking to improve off-take.

18mt of coal has been auctioned and committed for off-take (as part of its import substitution drive). Further, e-auction is being done at the notified price for import substitution (reserve price has been cut to notified price) till Sep'20. COAL India would also not charge bonus/penalties for higher than agreed off-take quantities.

 

Capex to continue with production target of 1b ton

COAL India has noted that it expects thermal power demand to continue at least for the next 10-15 years in the country. Accordingly, it plans to increase production to 1b ton over the next 3-5 years. For the same, COAL would continue to incur capital expenditure related to heavy engineering machinery and coal evacuation. While COAL is still finalizing its investment plan, it has set FY21 capex target at INR120b, which might increase in the coming years.

A large part of the INR500b capex program on Coal Infrastructure announced by the Finance Ministry would be borne by COAL. However, there would be certain capex, which would be incurred by thermal plants and Railways (for railway line works). In addition, this amount includes certain loan component as well. COAL believes that projects related to these schemes could be completed over the next 3-4 years.

 

Other highlights

Dividend policy: COAL is working on forming a dividend policy.

Commercial mining: Land acquisition, ECs and evacuation may remain an issue for commercial coal miners as well. COAL does not expect any negative impact from commercial coal mining as it plans to be competitive. COAL believes that the new commercial coal mines would take at least 4 years to produce coal.

Employees: COAL would reduce its net employee count by 12,000 annually over the next 3-4 years.

FY21 Guidance: COAL had set its FY21E production target at 710mt before the COVID-19 situation. However, the company would have to scale it down depending on how the COVID-19 situation plays out.

 

Valuation and view

Near-term headwinds persist as negative operating leverage kicks in

India's nationwide lockdown came at a time when (a) power demand was largely muted, and (b) production at COAL's mines ramped up (post the heavy monsoon season). Accordingly, inventory at both coal mines and power plants has risen. However, power demand has been recovering, inching up 700MUs from 3,000MUs levels witnessed at end-Apr'20. Recovery in power demand would be the key to improve coal off-take.

"We cut our FY21E adj. EBITDA estimates by 11% to account the lower e-auction prices. However, we expect COAL to tide over the situation in the near term given its robust cash position (Net cash: Rs 300b). The stock trades attractively at 1.5x FY22E EV/adj. EBITDA (v/s historical average of 7x), P/E of 5x (v/s average of 13 times) and offers a dividend yield of 7%. Maintain Buy with a target price of Rs 195/share," Motilal Oswal report has stated.

 

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