Motilal Oswal’s take on Coal India Ltd
According to the brokerage, the company’s “dispatch guidance for FY22 has been increased to 660-670mt compared to its previous guidance of ~640mt. This is in light of a recovery in demand, especially from the Power sector, driven by higher international coal prices, leading to higher demand from COAL. With a recovery in demand from the Power sector, supplies to non-regulated sectors have been squeezed. The same has now begun to recover as both production and dispatches have improved post-monsoon. Our FY22 e-auction ASP at INR1650 is conservative, considering 2Q e-auction ASP of INR1,594/t (a 15.3% premium over FSA prices), while the current premium over FSA is ~50%. We see scope for an upward revision to our FY22 estimate, if current e-auction premiums sustain, provided volumes pick up.”
Motilal Oswal in its research report has commented that “COAL last raised prices in FY18. With wage negotiations underway, we expect COAL to immediately announce a price hike, which should cover the increased wage bill and leave room for a margin improvement. Receivables have improved significantly to INR120b from INR180b at the end of FY21, thus improving its liquidity position. COAL now carries a cash balance of ~INR300b. The stock is attractively available at 3.4x/3x FY22E/FY23E EV/EBITDA. While demand is likely to improve post-monsoon, the second half of the fiscal is generally stronger compared to the first half for COAL. The strong dividend yield of ~11% supports the downside.”
Key takeaways from the management conference call according to Motilal Oswal
- CAPEX for FY22 is pegged ~INR170b, of which COAL has so far spent INR70b. It is still sitting on a liquidity of ~INR300b.
- The company has fixed 7th Dec’21 as the record date for declaring dividends.
- COAL is likely to sell about 95mt in the e-auction (similar to FY21), provided demand from the Power sector is not as overwhelming as it was in Sep-Oct’21. Sales to the Power sector is at a 20% discount to the non-Power sector, so any significant uptick to the Power sector at the cost of sales to the non-Power sector dampens COAL’s profitability
- The company is still working on a plan for achieving a production capacity of 1b tonne. While it had planned to previously reach the target by FY23-end, the revised target now stands at FY24-end. This plan could be further delayed as first-mile connectivity is the most challenging part of any mine’s evacuation plan.
- India imports about 70mt of thermal coal of a grade that can be replaced by COAL. This is equivalent to about 100mt for COAL. The management highlighted that it has been able to supply about 60-60mt.
Buy Coal India Ltd. with a target price of Rs. 200
According to the brokerage’s call “We value the stock at 4x FY23E EV/EBITDA with a TP of INR200. We maintain our Buy rating, with a revised TP of INR200/share (from INR185 earlier). A surge in coal demand from the Power sector, which could squeeze supplies to non-regulated sectors through e-auctions, remains a key risk as it could hurt profitability.”
The stock has been picked from the brokerage report of Motilal Oswal Financial Services Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.
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