Coal India gains 1.5% after Jefferies jacks up target, upgrades stock on strong Q2 earnings

Jefferies India upgraded the stock to buy from hold and increased its target price to Rs 385 a share, up 19 percent

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Shares of Coal India Ltd gained over 1.5 percent after Jefferies India and a host of other brokerages upgraded the stock and raised their target prices on the back of better-than-expected September quarter earnings by the state-run miner.

The stock hit a high of Rs 337.75 on the BSE and gained as much as 1.55 percent intraday. At 10am, the stock was trading at Rs 336 on the BSE, up 1.5 percent from its previous close.

Jefferies India upgraded the stock to ‘buy’ from ‘hold’ and increased the target price by 19 percent to Rs 385 a share.

It was not Jefferies alone. Motilal Oswal increased the target price on the Coal India stock by 18 percent to Rs 380 and retained the ‘buy’ rating, while Nuvama too reiterated the ‘buy’ call and hiked the target to Rs 404 from Rs 323 a share.

Coal India posted a 12.5 percent increase in Q2 net profit to Rs 6,800 crore, driven by higher sales and improved joint venture profits. The JV profits turned positive at Rs 89.75 crore from a negative Rs 140.75 last year. Revenue from operations increased almost 4 percent to Rs 3,277 crore, while EBITDA spurted 12 percent to Rs 10,121 crore, with a 29.1 percent margin. The PSU recorded a 12 percent on-year surge in volume, which helped offset the impact of lower e-auction prices and higher staff costs. The Coal India board declared an interim dividend of Rs 15.25 per share for FY 2023-24, with the record date set for November 21.

Jefferies said India’s strong economic growth outlook and rising power consumption have triggered a higher demand for coal, which should fuel healthy growth for Coal India in the coming years. The miner delivered a strong FY23 with the EPS rising 63 percent on-year to Rs 46 (FY07-22 peak was Rs 28), boosted by a sharp spike in e-auction realisation amid rising global coal prices.

“We were earlier concerned about a declining earnings profile as e-auction prices normalise and the quinquennial wage hike raises costs. An improved volume growth, along with lower-than-expected cost trajectory, have significantly improved Coal India’s earnings outlook. We upgrade FY24-26 EPS by 18-42 percent and now expect a mild 5 percent EPS CAGR over FY23-26, despite a high FY23 base. Our estimates assume cash EBITDA per tonne still falling slightly from Rs 587 in FY23 to Rs 560-565 in FY24-26,” Jefferies India said in its latest note.

Despite an 8 percent increase in employee costs to Rs 11,650 crore due to wage negotiations, CIL effectively managed other operating costs, resulting in a 1 percent YoY reduction in cost per tonne (excluding employee costs) to Rs 704. The company’s consistent volume growth of 9.4 percent from April to October, higher e-auction prices with the October average at Rs 3,800 a tonne beating Rs 3,294 of 1HFY24, and stabilising costs will boost earnings in the second half of FY24.

According to Nuvama, with a projected 6 percent volume CAGR from FY23 to FY26 to meet rising power demand, CIL can benefit from operating leverage, as employee costs are expected to remain lower than FY23’s levels through FY26. CIL’s earnings have fundamentally improved, and it’s poised to generate significantly higher EBITDA than the average of Rs251 billion recorded from FY18 to FY22 in the foreseeable future.

“In line with the strong performance, improved outlook on volume, e-auction premiums, and lower costs, we have increased our EBITDA estimates by 16 percent/13 percent for FY24/FY25. The stock is trading at 4.1x on FY25 EV/EBTIDA”, said Motilal Oswal in its latest note.

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