Comments
Target: ₹198
CMP: ₹211.75
Coal India utilises a large part of its operating cash flows as capex, yet both volume and EBITDA growths are low. While FY16-22 volume CAGR is a meagre 4 per cent, EBITDA CAGR is 6 per cent, which is sub-optimal, given the extent of operating cash-flows being reinvested in the business. As a result, incremental RoIC is negative.
Based on traditional valuation metrics of EV/EBITDA, PER, etc that we use to value other Metals and Mining companies in the sector, Coal India appears to be a value-pick, trading at FY24E EV/EBITDA and P/E of 3x and 5x, respectively. Coal’s ‘cheap’ valuation is an illusion, in our view, as these conventional valuation metrics are not applicable to a company that needs to invest sizeable amounts of operating cash flow every year just for maintaining its level of production. We, thus, believe that Coal India is a value trap.
We initiate coverage on Coal India with a Sell rating and one-year forward TP of ₹198/share.
Key upside risks: Large and bold FSA price-hikes by the company, notwithstanding the election-year based political compulsions/obligations; strength in e-auction prices continuing for a longer-than-expected duration due to various sectoral and geo-political circumstances; and big-bang foray into green energy or high multiple sunrise sectors.
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