Analyst Corner: Retain ‘buy’ on Coal India with target price of Rs 165

By Edelweiss Securities

We analysed Coal India’s FY20 annual report. Three points stand out — larger subsidiaries outscore on profitability, productivity and technological absorption. Development of evacuation infrastructure to handle 1 billion tonne of coal by FY24 is underway. Working capital unlocking might release cash in the near- to medium-term. Meanwhile, contingent liabilities, legacy issues at ECL and BCCL, and diversification into unrelated fields are key overhangs. Furthermore, potential wage escalation may keep earnings growth muted. That said, an undemanding valuation and attractive dividend yield are formidable anchors. Retain ‘buy’ with a target price (TP) of Rs 165 (7.2x FY22E EPS).

We find that SECL, MCL and NCL continue to be key to CIL’s performance, accounting for 66% of production and 76% of PBT. The company’s performance slipped in FY20, mainly due to non-execution of key contracts at MCL and weather-related disruptions at SECL. To date in FY21, MCL and NCL have fared better than other subsidiaries. Besides, these two subsidiaries outclass peers on both profitability and productivity. Hence, we expect MCL and NCL to provide a leg-up to CIL’s FY21 financial performance. We are upbeat about CIL’s focus on developing evacuation infrastructure; it is imperative to meet the FY24 production target of 1 billion tonnes. While seven railway lines are crucial, we would also emphasise the importance of 35 First Mile Connectivity (FMC) projects —they would not only reduce reliance on road transport, but also improve mechanisation and reduce the carbon footprint.

Execution of evacuation infrastructure projects is taking place mostly near MCL’s and SECL’s large mines, wherein evacuation is a constraint. In our view, this infrastructure will complement the 52-capacity enhancement projects currently underway.

In our view, evacuation infrastructure and production capacity enhancement provide long-term comfort on CIL’s earnings growth. Furthermore, we do not believe merchant mines would affect CIL’s market share materially. In the near-term though, contingent liabilities -particularly relating to income tax – and environmental issues remain the key overhangs.