PSU coal mining company Coal India Ltd (CIL) has come up with an offer for sale (OFS) of about ₹4,200 crore where the government of India is looking to offload about three per cent stake in the company. The OFS is priced at ₹225, which is 6.7 per cent discount to closing price of ₹241 on Wednesday, when the open offer was announced. The stock price declined 4.6 per cent on Thursday, reflecting the impact of open offer announcement price, as arbitrage players try to tap the opportunity. The issue is open for subscription to retail investors on June 2, while it was open for non-retail investors on June 1.  The non-retail portion was oversubscribed 345 per cent by end of the day reflecting huge demand.

Post OFS, the government will be holding about 63 per cent stake in the company.

Given the discount in price, attractive valuation and robust fundamentals, investors can subscribe to the OFS. In our bl.portfolio edition dated September 18, 2022, we recommended investors to accumulate the stock of Coal India Ltd (CIL) and further post its recent Q4FY23 results, we have maintained the same stance.

Recent events

CIL’s board recently approved a price hike of nearly 8 per cent over and above the existing fuel supply agreement (FSA) notified price for high-grade non-coking coal of grade G2 to G10. The grade comprised nearly 30 per cent of CIL’s FY23 volume. Such hike has happened nearly after five years and it was much needed amid recent 19 per cent wage hike to non-executives.

As per the management, the revision can generate an incremental revenue of around ₹2,703 crore for the rest of FY24. Though not fully, the FSA hike can at least compensate for around 50 per cent of the cost increase due to wage hike component, as the wage bill is expected to increase by around ₹6,000 crore.

Outlook and Valuation

CIL achieved its FY23 production target of about 700 mt, up 13 per cent year on year and had an overall offtake of 695 mt — up around 5 per cent. Due to higher rake availability and a strong estimated power demand, the company has fixed the production target at around 780 mt implying about 11 per cent growth for FY24. Further, as per a NITI Aayog report, a production target of one billion tonnes per annum has been set.

Currently, the stock trades at a one-year forward P/E of 6.5 times (Bloomberg estimates) below its historical five-year average P/E of 7 times. For FY23, CIL has declared a dividend of ₹24.25 per share, translating into a healthy 10.5 per cent yield at current market price.

Despite operating in a capex-driven business, the company maintains healthy financials by consistently generating positive free cash flow and remaining a net-cash company. We continue to maintain an ‘accumulate’ stance on the stock due to the company’s monopolistic nature of business, healthy financials, strong dividend yield, robust power demand and attractive valuation.

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