Brokerage firm Motilal Oswal Financial Services has maintained a ‘buy’ call on Coal India stock with a target price of ₹275, implying a 32 percent upside, as the brokerage firm believes Coal India is well-placed to capitalise on the growth opportunity ahead.
"Robust domestic demand, an enhanced vision of 1bt production, and improved e-auction premium are all set to drive a strong near-term performance," said Motilal Oswal.
Shares of Coal India hit their 52-week high of ₹263.30 on BSE on November 9, 2022. As of March 24 closing, the stock is down nearly 21 percent from that level.
The brokerage firm highlighted that Coal India's growth roadmap is in synergy with the government’s commitment to bring about a transformative change in the power sector by providing a 24x7 power supply to all homes. This sets the stage for Coal India to achieve strong coal production over the next few years.
The brokerage firm believes Coal India’s long-term demand commitment from numerous power plant companies for FSA provides the company with better business visibility.
"Though the e-auction premiums have cooled off from their highs, it was compensated by higher volumes in e-auction. We expect Coal India to register a better quarter-on-quarter (QoQ) performance in the fourth quarter (Q4) with higher volumes on e-auction and almost similar levels of premium," said Motilal Oswal.
Motilal underscored the record capex of Coal India.
“Coal India has been investing heavily in land acquisitions, coal evacuation initiatives, rail infrastructure, contract finalisations, mining fleet, digitalisation, etc., to eventually increase the production capacity and reach 1bt,” it said.
Moreover, strong domestic demand is also a major positive factor.
Motilal Oswal pointed out that Coal India is the largest supplier of thermal coal to power sectors (75-80 percent of fuel requirement is met by Coal India), and hence, power security in India is directly dependent on the performance of Coal India.
Motilal believes demand for coal will increase on the back of enhanced demand for power for rural electrification and ‘Power For All Scheme’.
India’s peak power demand is expected to touch around 225gw in Apr ’23 and the government has mandated power plants to function at full capacity to meet the higher anticipated demand, which will then drive the demand for thermal coal during the summer season, said Motilal Oswal.
As per the brokerage firm, Coal India is also diversifying and expanding to other verticals under the ‘Coal to Chemicals’ business strategy, which will ensure greater value addition, and thereby, improve financial performance in a long-term sustainable manner.
"Coal India is trading at 3.6 times our FY24E EV/EBITDA and 1.8 times our FY24E P/B, respectively. Q4 is a seasonally stronger quarter with the onset of the summer season. The demand for power, too, increases, consequently driving the requirement for higher coal volumes by power plants," Motilal Oswal said.
"We maintain our e-auction premium estimate for FY23 at 231 percent and we reiterate our buy rating on the stock with a target price of ₹275 (5 times EV/EBITDA). Coal India continues to be our top pick in the mining sector. Any hike in FSA will further add to the financial performance of the company," the brokerage firm said.
According to a MintGenie poll, 21 analysts on an average have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
