Buy Coal India; target of Rs 520: Motilal Oswal

Motilal Oswal's research report on Coal India

In a recent investor interaction, Coal India (COAL) management highlighted the following points: a) COAL would achieve production of 770mt in FY24 and 838mt by FY25; b) e-auction premiums have softened in 4QFY24 to 35- 50%, but volumes via the e-auction route have improved (15% vs. 8-9% in 9MFY24); and c) the company is committed to supplying at least 610mt to the power sector in FY24 and increasing the dispatch by 50mt p.a. going forward. Based on the YTD performance, COAL is confident of achieving 770mt of production during FY24, with five subsidiaries on track to achieve 100% of the annual production target. The number is lower than earlier guidance as SECL subsidiary would fall short by 8-9mt due to some pending clearance for mine. Though e-auction premiums have declined in Jan-Feb’24 to 35-50% from 117% in 3QFY24, the increase in e-auction volumes (~15% of the quarterly dispatches vs. 8-9%) would largely offset the impact. Domestic power generation is expected to grow by 7.7% to 1,750bu in FY24, which will drive coal demand. Dispatches to coal-fired plants till Jan’24 stood at 509mt (up 7.3mt YoY) and are expected to cross 610mt in FY24E. In line with the recent trend in e-auction premiums, we have trimmed our eauction premium for FY26E while increasing e-auction volumes.

Outlook

As a result, we have increased FY26E revenue/EBITDA/APAT by 1%/9%/7%. COAL trades at EV/EBITDA of 4.9x FY26E. We reiterate our BUY rating on the stock with a revised TP of INR520 (5.5x EV/EBITDA). We believe COAL is well placed to capitalize on the growth opportunity ahead.