Buy Coal India; target Rs 439: Motilal Oswal

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26 Aug, 2025 12:21

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Motilal Oswal's report on Coal IndiaCoal India (COAL) is delivering impressive double-digit production growth, pleasantly surprising consumers.E-auction supplies have jumped, affecting realizations in recent months. We continue to believe that e-auction realizations would soften, and cut our realization estimate for FY18 by INR270/ton to INR1,849/ton. This should be the bottom-of-the-pit realization.Growth in coal demand from power utilities is slowing. We have reworked our demand-supply model to factor slower growth in demand from the power sector. This results in a 103m-ton swing in volumes to the higher margin non-power segment. The share of market-linked non-power volumes is likely to increase from 21% in FY15 to 32% in FY20. Imports of thermal coal would remain high at 158m tons (earlier 246m tons).We have increased cost of mining to factor higher strip ratio. Lower diesel prices and technologically superior explosives would reduce specific costs. COAL should benefit from operating leverage, as production accelerates.We expect earnings growth momentum to continue, notwithstanding lower e-auction prices, as COAL keeps its focus on production growth. We have cut our earnings estimates marginally, and our target price from INR450 to INR439. The stock is trading at 6.4x FY17E EV/adjusted EBITDA. Dividend yield is attractive at 5-6%. Reiterate Buy.We continue to believe that COAL will be able to grow dispatches at a CAGR of 10% to 781m tons by FY20. In the recent analyst meet, the management reiterated its focus on growing production. The first phase of three critical rail links in Odisha, Chhattisgarh and Jharkhand is on track for completion by June 2016, September 2017 and December 2017, respectively.Accelerating production, increasing net attrition, and increasing share of lower cost contracted production augurs well, and will provide significant operating leverage.COAL is likely to deliver 12.8% CAGR in adjusted EBITDA to INR386b by FY20, largely benefiting from operating leverage, transparent pricing for non-power sector, and 10% volume CAGR."We value the stock at INR439, based on DCF valuation (WACC of 12.8%), marginally lower than our earlier estimate of INR450. The stock is trading at an EV of 6.4x FY17E adjusted EBITDA. Re-iterate Buy for the target price of Rs 439", says Motilal Oswal research report.For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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