Sell Coal India Ltd For Target Rs. 290 By Choice Broking Ltd
“Attractiveness” based on cheap valuation multiples is an optical illusion
Coal India Ltd (COAL) trades at cheap valuation multiples of ~5x/9x/1x FY27E fwd EV/EBITDA, P/E and EV/CE respectively. These headline multiples make the stock look attractive, but we believe it is a Value Trap as these metrics conceal more than they reveal.
Below are the key pillars of our Investment Thesis that make us disillusioned on COAL:
1) Pricing - Discounted Pricing and Unfavorable Sales Mix: Discounted pricing and unfavorable sales mix make COAL’s core business model questionable and makes us believe that its motto is not profit driven.
2) Huge Capex, yet EBIT Momentum is Flat - Running on a Treadmill?:
COAL’s situation is akin to running on a tread mill to cover distance, resulting in no commensurate progress made despite running hard. Over FY26E-29E, COAL will spend a whopping INR 800Bn (~53% of OCF on capex), yet EBIT growth will be negative over FY24-29E.
3) Cash is Restricted: COAL has a net cash balance of ~INR 328Bn (~14% of current market cap) as of FY25 end. However, there are long term provisions to the tune of ~INR 745Bn which need to be set off against the cash balance, in our view. Recent accounting policy changes by COAL enable for unwinding the stripping activity provision (~INR 580Bn as at FY25 end), but it would take 5-10-15+ years to unwind the same in our view.
4) Declining GCV: COAL’s mined product’s Gross Calorific Value (GCV) has been on a downward trend over the last 10 years, which straight away impacts realisations & profitability and there is no reason for us to believe that this trend would reverse.
5) All FCF Post Capex is Paid as Dividends, hence DDM is our preferred method: COAL is a cash cow where all free cash flows post capex are paid out as dividends. We thus believe a realistic way to value COAL is to focus on its dividend paying potential; hence we use the classic Dividend Discount Model (DDM) to value the company. Valuation: We use a scenario based approach. Our Base Case Scenario TP (DDM-based) is INR 290/sh. Our Upside Scenario (10-15% probability event in our view) uses a mix of multiples and DDM for a value of INR 500/sh, while our Downside Scenario (10-15% probability event in our view) value is INR 225/sh (DDM-based).
At CMP COAL’s dividend yield is ~7%, which is optically high, but unattractive in the absence of other value drivers and doesn’t cover of equity of ~13%.
Risk to our SELL rating: A reversal in government policy to substantially align coal prices with a profit maximization motive is a risk to our SELL call.
For Detailed Report With Disclaimer Visit. https://choicebroking.in/disclaimer
SEBI Registration no.: INZ 000160131
