Buy Coal India; target of Rs 338: Motilal Oswal
Motilal Oswal ‘s research report on Coal India
Coal India’s (COAL) coal production growth has started sputtering (Exhibit 1). It has reached a point where growth of dispatches will suffer not only in FY19E, but also in FY20E. COAL builds inventories during 2H of any financial year in order to meet demand in the 1H of the next financial year, when production is usually lower due to seasonally high heat followed by monsoons. Unfortunately, COAL’s inventories are now significantly lower than the historical levels (Exhibit 2:). Our channel checks suggest that COAL is unlikely to surprise positively in the remaining three months of FY19E. SECL is struggling with production growth. Talcher coal fields have inventories but offtake is an issue, while IB valley’s mines are suffering from slow land acquisition. Various government agencies and COAL’s top management need to work on a war footing to address these issues, else production growth will suffer. Therefore, it has become inevitable that we tone down our expectations. We are reducing our sales estimates by 1%/2% to 612mt/645mt for FY19E/FY20E.
Adjusted EBITDA is expected to increase at CAGR of 16% over FY18-20E on high operating leverage driven by 5-6% volume growth and cost reduction on high natural attrition. We maintain BUY and value the stock at INR338/share based on EV/EBTIDA of 6.5x, in line with valuation of mining stocks.
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