Published on 7/12/2020 11:27:44 AM | Source: HDFC Securities Ltd

Buy Coal India Ltd For Target Rs.165 - HDFC Securities

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Buy Coal India Ltd For Target Rs.165 HDFC Securities

Our Take:

Coal is our country's irreplaceable primary energy source. Coal is at the forefront of the nation's energy march in meeting the fuel demand. Notwithstanding the projections over renewables displacing coal, it will continue to dominate India's electricity generation for few more decades. Additionally, coal will continue to stoke up many non-power industries as well viz. cement, fertilizers, sponge iron, aluminum and a host of other industries. In India, coal accounts for around 55% of the country's primary commercial energy and nearly 72% of the entire power generated in the country is coal based, which is a testimony to the importance of coal. The focus on renewable and other clean form of energy sources remains a concern for the longer term, however we believe that those concerns are already factored in the current prices. Coal India has taken major initiatives to build matching logistics infrastructure to ensure evacuation of planned quantity of production.


Valuations and Recommendations:

Coal India is the single largest producer of the coal in the world. The stock has significantly underperformed the benchmark indices over the last few years on the back of multiple factors acting against the company. We believe most of the negatives are priced in and the extent of de-rating in the stock is not justified given its fundamentals. We however do not have a very positive view on the stock for the long term but feel that there is tactical opportunity for the short term in the stock. We expect Coal India’s earnings may gradually stabilise on the back of recovery in coal demand. This could ease the cash crunch at its subsidiaries caused by the slowdown in coal demand and record-high outstanding payments from power companies. Coal India is expected to maintain dividend around the same level of last year. Coal India may also consider buy-back of its shares. The stock is trading at significant discount compared to its 5 year historical average multiples. Government’s strong push to replace thermal coal imports is helping CIL’s volume growth. Coal-based generation grew 5.3% YoY in Nov (till the 26th), following growth of 14.6% in Oct. Recovery in industrial demand has driven the strong rebound.

We believe that at a dividend yield of ~10% coupled with attractive valuations and continuous underperformance of the stock (albeit not so underwhelming financial performance) provides a good opportunity for contrarian investors. The stock currently trades at ~2.7x FY22E EV/EBITDA. We feel investors can buy stock at LTP (~2.7x FY22E EV/EBITDA) and add more on dips to Rs.120-122 band (~2.4x FY22E EV/EBITDA) for base case target of Rs. 147 (~3.1x FY22E EV/EBITDA) and bull case target of Rs. 165 (~3.6x FY22E EV/EBITDA).


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