Sell Coal India Ltd for the Target Rs. 290 by Choice Institutional Equities
See Through the “Cheap” Valuations
We maintain our SELL rating on Coal India (COAL) with a TP of INR 290/sh.
“Attractiveness” based on cheap valuation multiple is an illusion
COAL trades at cheap valuation multiple of ~5x/9x/1x FY27E 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.
The key pillars of our investment thesis which make us disillusioned on COAL are: 1) Discounted pricing and unfavourable sales mix, 2) Huge capex, yet EBIT momentum will be negative - running on a treadmill kind of a situation, 3) Cash is restricted due to large long-term provisions and 4) Declining GCV across subsidiaries.
All FCF post-capex is paid as dividend; hence DDM is our preferred method: COAL is a cash cow where all free cash flow post-capex is paid out as dividend. 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)
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 so as to reach 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 does not cover cost of equity (~13%).
Risk to our SELL rating: A possible reversal in government policy, which would substantially align coal prices with a profit maximisation scheme.
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