Coal India shares ‘Buy’ or ‘Sell’: brokerages eye revival in offtake, attractive 10% dividend yield

On a consolidated basis total revenue from operations for Coal India stood at Rs 17,007 crore at the end of the previous quarter, down from Rs 23,223 crore from a year ago period.

Mining major Coal India managed to beat street estimates when it announced a 55% drop in net profits last week. The public sector entity declared a consolidated net profit of Rs 2,077 crore at the end of the April-June quarter, down from Rs 4,629 crore the company reported in the same period last year. Apart from beating street estimates the company informed investors that recoveries have been good with shipments rising 9% from the previous year, the first time in six months. Analysts are still upbeat on Coal India expecting coal usage to grow in India and an attractive valuation luring in investors.

On a consolidated basis total revenue from operations for Coal India stood at Rs 17,007 crore at the end of the previous quarter, down from Rs 23,223 crore from a year ago period. Fixed costs pushed expenses, which were only marginally down from the previous year. Production at the end of the quarter stood at 0.04 million ton, while offtake was down to 0.09 million ton. In the first quarter of this fiscal year, adjusted EBITDA was down 63% on account of e-auction realizations and lower offtake. E-auction volumes were down 17% on-year basis to 15.9 million ton; E-auction realization was down 26% on-year. 

However, the resurgence of power demand after the unlocking began could turn the tables for Coal India. Brokerage and research firm Motilal Oswal expects volumes to recover in the second half of this fiscal. India continues to depend on coal for ~70% of its electricity requirement – with coal-based generation forming 55% of the country’s installed capacity. “We expect coal-based generation to increase at CAGR of 6.5% over the same period, driving the need for coal in India,” Motilal Oswal said in a note. Coal India has net cash of Rs 23,000 crore putting it in a comfortable position. 

Additionally the dividend yield of 10% has attracted not only Motilal Oswal but even global brokerage and research firm JP Morgan. The brokerage firm too believes that normalisation would come with power demand resurgence, which it expects to happen in the next fiscal year. “Coal India has seen the most severe de-rating over the last three years, from ~9x EV/EBITDA to <5x. While there have been increasing ESG concerns, we believe the bigger driver of the de-rating has been the on-tap government supply of paper and now surging receivables from the power sector,” said Pinakin Parekh of JP Morgan in a co-authored note with Anukul Agrawal. However, continued lockdowns and write-off of power sector receivables are some key concerns. JP Morgan is Overweight on the stock with a target price of Rs 192 per share.

Kotak Securities highlighted that coal dispatches improved in the month of August and saw growth of 9.6% on-year basis as coal inventories across power plants in India declined to 22 days. The brokerage firm has a ‘Buy’ call on the stock with a fair value of Rs 195. On the other hand Motilal Oswal has a target price of Rs 190 apiece.