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MOSL: COAL INDIA (Buy) - A case of misplaced valuations; attractively valued at ~3x EV/EBITDA

coal india: A case of misplaced valuations; Attractively valued at ~3x EV/EBITDA

(COAL IN, Mkt Cap USD16.7b, CMP INR195, TP INR264, 36% Upside, Buy)

 

FY19 turned out to be a standout year for Coal India (COAL), with its adj. EBITDA increasing 48% YoY led by higher realizations. The company’s ability to hike FSA prices and increase evacuation charges is a reflection of its dominant position in the industry, in our view. Moreover, even after the price hike, FSA prices are 30-40% lower than the e-auction rates (i.e., market rates). This indicates that there is still significant pricing power left with the company.

 

Despite the robust performance, COAL’s stock price is down ~30% since end-Mar’18 (v/s BSE Sensex: +11%), with valuations at ~50% discount to its long-term average. While continuing government divestment has exerted some pressure, we note that the decline in COAL’s valuation coincides with the fall in valuations of coal mining companies globally. Recent announcements of mining companies to cap/exit coal production have raised questions on the sustainability of coal.

 

In this report, we highlight India’s divergence from other major coal-consuming economies (US, China) in terms of coal consumption. In our view, from India’s standpoint, coal is here to stay, despite increasing renewable generation (unless storage technology develops). At current price, COAL’s market cap = 12 years of its discounted FCF. We reiterate our Buy rating with a TP of INR264 (36% upside).