Top Brokerage Bets On This PSU Maharatna Stock, Suggests Buy For 17% Returns

Axis Securities in its recent research report on Coal India Limited (CIL) rated "buy" for a target price of Rs 262 per share. Investors buying the stock of the company at the current market price are likely to gain up to 17% considering the given target price. According to the brokerage, Volume growth & richer pricing mix are to drive profitability. CIL is a maharatna company, under the ownership of the Ministry of Coal, Government of India. It has a market cap of Rs 1,38,538 crore.

Business Overview

Coal India Ltd (CIL) is the largest coal producer in the world. Its coal production share stood at 80% of the domestic coal production in FY22. It has ~55% of India's total coal resources under it. It has strategic importance in meeting India's energy requirement as ~51% of the country's power generation capacity is derived from coal-based thermal power plants. In FY22, ~80% of the coal dispatch from CIL was to the Power sector. CIL's coal production grew by 4% YoY in FY22 to 623 million tonnes (MT), while dispatch rose by 15% YoY to 662 MT. The company has a production and dispatch target of 700 MT for FY23.

Stock Outlook & Returns

The stock's current market price on NSE stood at Rs 225.45 per share. It was opened at Rs 230 per share. The stock recently touched its 52-week high level at Rs 240.50 recorded on 8 September 2022. It hit the 52-week low level on 20 December 2021 at Rs 139.15.

In the past 1 week, the stock gained roughly 1.1%, whereas, in the past 1 month, it moved down nearly 5.01%. In the past 3 months, it gave 16.73% positive return. In the past 1 and 3 years, the stock has surged nearly 14.66% and 19.39%, respectively. However, in the past 5 years, it gave 20.23% negative return.

Robust business profile with stable and healthy operating margins

The Company's EBITDA margins have been healthy and stable averaging 25% over the last decade. This has been on account of abundant coal resources, conducive geological conditions, the company's improving productivity in terms of output/man-shift due to manpower reduction through the closure of underground mines, higher outsourcing, and Capex on open cast mines and evacuation expenditure. However, the margins dipped in FY18 (14%) as it undertook one-time expenses on provisions towards wage revision. Wage revisions are due now and the company expects them to complete by the end of FY23. Keeping this in view, we model a 10% increase in the employee cost along with a 6% hike in blended average sales prices (ASP) to factor in higher e-auction prices and an expected hike in FSA prices (option value).

Higher international coal prices lead to Higher e-auction coal prices

Higher international coal prices driven by heightened geopolitical tension have led to lower imports and higher e-auction premiums for domestic coal. In Q1FY23, FSA/e-auction/washed coal prices all stood higher YoY by 3%/177%/63% and on a sequential basis, FSA prices marginally declined by 2% whereas, e-auction and washed coal prices jumped up 78%/24% respectively. E-auction premium over FSA stood at a massive 201% as against 65% in Q4FY22 and 13% in Q1FY22 However, E-auction volumes stood lower in Q1FY23. E-auction sales volume stood at 12% of total coal off-take from 15% in Q4FY22 and 19% in Q1FY23. The drop in e-auction sales indicates a higher supply to the power sector during the peak summer season. With the onset of monsoon, we expect the e-auction volumes to gradually increase as the peak power demand subsides.

Strong cash flows to keep the dividend yield high

CIL has a robust financial risk profile with healthy net cash and cash equivalents of Rs 25,870 Cr (as of Mar'22). Trade receivables have come down to Rs 11,368 Cr in FY22 from Rs 19,623 Cr in FY21 leading to positive free cash flow in FY22 (post working capital changes). The company has a Capex plan of Rs 17,000 Cr for FY23, primarily on evacuation infrastructure. Despite the proposed Capex and high dividend payout, liquidity will remain robust over the medium term, backed by a robust capital structure and healthy cash accrual.

Valuation & Outlook

According to the Axis Securities, Higher international coal prices and volume growth and CIL's focus on closing the non-profitable manpower intensive high cost underground coal mines and expanding the large open cast mines will drive the profitability. "We recommend a BUY rating on the stock and value it at 4.3x FY24E EV/EBITDA to arrive at a Target Price of Rs 262," the brokerage said.

According to the brokerage, the Key Risks to the buy call would be: a) Low power demand, b) Fall in international coal prices c) Input cost inflation and wage hike.

Disclaimer

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