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Target: ₹550
CMP: ₹435.90
We initiate coverage on Coal India with a Buy rating and target price of ₹550. Although we strongly endorse the energy-transition narrative and that renewable energy would dominate the global energy mix, we believe India’s large population and expansive scale make it unfeasible to phase out the use of coal for the next decade at least.
India’s current growth momentum makes the wait for energy transition difficult; hence, the use of coal should actually until renewables scale up. A sustained coal demand tailwind coupled with the “high-growth, high-cash generation” phase compels us to be buyers of the stock.
Coal India is embarking on a multi-year value-creation journey with volume growth, strong margins, and free cash generation. We believe the company will succeed with sustained high returns on invested capital along with volume growth until the end of this decade.
We believe the stock is transitioning from a dividend-yield story into a holistic value-creation one. We expect the stock to generate an FCF yield of 8.8 per cent and a dividend yield of 6.7 per cent. Our bull/bear case valuation is ₹660 and ₹330.
Key risks: Faster adoption of renewable energy which could derail growth prospects of coal volumes; ESG narrative coming back in vogue, leading to exclusionary criteria with some investors; and disinvestment by the Government of India.
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