Coal India: Motilal Oswal Recommends Buy with INR600 Target Price on Robust Volume Growth Outlook
Motilal Oswal has issued a "Buy" rating for Coal India (COAL), with a target price of INR600, representing a potential upside of 21%. The brokerage's bullish outlook is primarily driven by the expectation of robust volume growth in the coming years, fueled by India's increasing reliance on thermal power as the country strives for a USD5 trillion economy.
Key Highlights from the Report:
- Coal India's production volume is expected to grow at an 8% CAGR over FY24-26.
- The company aims to achieve a production volume of 1 billion tons in the next 2-3 years.
- E-auction volumes are anticipated to contribute significantly to revenue and EBITDA growth.
- Coal India is undertaking a major capex program to expand and modernize its infrastructure, including setting up new coal washeries.
- The company's EBITDA margins are anticipated to remain robust.
Crucial Points from the Report:
Coal India's production in August 2024 declined 12% year-on-year, but the company's production and dispatches have still been relatively strong in the first four months of FY25, with dispatches up 1% year-on-year at 308 million tonnes. The company anticipates that the thermal power sector will continue to be a key growth driver, with its share of overall dispatches expected to remain at 80%. Coal India's FY24 production met its target, and several subsidiaries even exceeded their goals. Notably, India's peak power demand has been growing, reaching 234 GW in May 2024, which underscores the growing need for thermal power plants to provide a reliable and consistent energy supply.
India's transition towards a USD5 trillion economy is expected to drive an increased reliance on thermal power generation, maintaining its position as a dominant source of energy. Coal India, as the primary coal producer, is well-positioned to capitalize on this trend. The company is also enhancing its capabilities by increasing its washed coking coal production capacity, which should strengthen its competitive position in the domestic market.
Potential Risks:
While the report paints an optimistic picture, potential risks include the impact of erratic monsoons on coal production and any unforeseen fluctuations in global coal prices, which can affect realizations.
Forward-Looking Outlook:
Motilal Oswal believes that Coal India's robust volume growth outlook, combined with healthy e-auction premiums and improved cost efficiency, will lead to a positive future. The brokerage expects the company to achieve a production of 838 million tons in FY25.
Valuation Method:
The report uses an EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple to arrive at the target price. Motilal Oswal values Coal India at 6x FY26E EV/EBITDA.
In Conclusion:
Coal India appears to be well-placed to benefit from the increasing demand for thermal power in India. The report highlights several positive factors that support the brokerage's "Buy" recommendation. However, investors should be aware of the risks associated with the company's operations, such as the impact of weather conditions and global coal prices.
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