Centrum Broking

Coal India (Buy)

Target: ₹252

CMP: ₹185.2

Coal India is back on the growth path after a subdued FY21. The shortage of coal globally amid supply crunch and higher demand might put environment concerns on the back burner for the time being.

The recovery in demand and surge in international thermal coal prices (up 3 times in one year) would drive domestic price increase in both e-auction and FSA coal. Besides, due to seasonality, coal volume too would continue to rise in H2FY22. This would help offset an increase in employee cost (due to wage revision for non-executives w.e.f. July 2021). With improved outlook on coal earnings, we believe the increase in employee cost will be more than offset. Coal India’s receivables are also on a downtrend, with debtors down by about ₹3,800 crore to about ₹15,800 crore at August-end.

The company had given dividend of ₹16 per share in FY21 and we expect DPS of ₹20 in FY22 and FY23. At current stock price, the dividend yield is about 11 per cent. We raise our FY22/FY23 EBITDA by 11 per cent/17 per cent to factor in a higher increase in FSA and e-auction coal prices, partially offset by higher employee and other operating cost.

As a result of the increase in earnings, we also increase our target price to ₹252 (earlier ₹200), based on 4x FY23 EV/EBITDA.