The Coal India (CIL) stock price has seen some heat recently with the Central government's share supply swelling — equity dilution by 3 percent via offer for sale (OFS) — and e-auction prices nosediving, noted analysts at Nuvama Institutional Equities in a research report. Nuvama has revised its price target down to Rs 361 from Rs 365.

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The stock was trading flat at Rs 227.55 apiece on the BSE in Wednesday's trade. At this level, Nuvama's stock price target suggests up to 60 percent potential upside for the counter. CIL shares tumbled 4.51 percent in the last month, while they rose 1.20 percent on a year-to-date basis. In the last year, the stock has rallied 23 percent.

The average e-auction premium spiralled down from 137 percent in April 2023 to 55 percent in mid-June 2023 as volumes soared under e-auction while global coal prices receded. That said, the brokerage reckons downside to e-auction prices is limited as Coal India's prices are still at a discount to global prices.

"Factoring in the weakness in e-auction prices, we are lowering CIL's FY24E EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) by 6 percent and keeping the FY25E EBITDA unchanged. We thus arrive at a marginally lower target price of Rs 361, valuing the stock at 4.5 times FY25E EV (enterprise value) or EBITDA," Nuvama said, maintaining a ‘buy’ call on the counter.

Nuvama believes that thermal power generation will increase by 4–5 percent year-on-year during the months ensuing monsoon, which shall lead CIL to increase supply to the power sector and in turn help in firming up e-auction prices.

"We are reducing the average e-auction coal price to Rs 2,700 per tonne from Rs 3,000 per tonne earlier for FY24E, and maintain it at Rs 2,035 per tonne for FY25E. A change of Rs 100 per tonne in e-auction coal price leads to a change of 2 percent in FY24E EBITDA," the note stated.

Other charges levied by CIL restrict a major fall in earnings

While investors always focus on fuel supply agreements (FSA) or e-auction prices to determine Coal India's profitability, Nuvama highlighted that a few charges — evacuation charges, surface transportation charges, forest transit fees, etc. — levied by CIL along with washed coal and other services contribute meaningfully to its profits, too.

"Our calculation suggests that others constitute 37 percent of FY23 EBITDA (FY18–23 EBITDA CAGR of 19 percent) and its contribution shall increase to 45 percent in FY25E as profits from e-auctions fall," the brokerage noted.

During FY18-22, Coal India recorded an average EBITDA of Rs 25,100 crore. In light of increasing volume, partial FSA price hike and cost peaking out, the brokerage believes that CIL would continue to generate much above-average EBITDA in the foreseeable future.

Besides, analysts believe, it should continue to pay out dividends per share of at least Rs 20 each in FY24 and FY25 — implying a handsome dividend yield of 9 percent. Negatives such as employee cost increases and OFS by the government are behind. Risk-reward is favourable, said analysts.

First Published:Jun 21, 2023 12:04 PM IST