EUR 120.00 For Business Accounts Only

MOSL: COAL INDIA (Buy)-Coal demand to rise 3x even after tapping RE potential-Valuations at 50% discount to its averages

Coal India: Coal demand to rise 3x even after tapping RE potential; Valuations at 50% discount to its averages and dividend yield at 9-10%

(COAL IN, Mkt Cap USD18.7b, CMP INR215, TP INR281, 31% Upside, Buy)

 

Coal India (COAL) has witnessed unprecedented de-rating over the past 2-3 years. Its stock is currently trading at 7.4x P/E v/s average of 14x (Exhibit 1:), despite strong RoE at 35-40% (Exhibit 2:) and 3.5x EV/EBITDA v/s average of 7.2x (Exhibit 3:). The company continues to generate strong free cash flows (Exhibit 4:), which allows it to distribute dividends in excess of 100% of earnings (Exhibit 5:). Currently, dividend yield has increased to 9-10% with current valuations at 45-50% discount to long-term averages, which is a typical trait of a commodity stock at the peak of an earnings cycle. But, the same is perplexing in the case of COAL as 81% of its revenue is non-cyclical. Selling price of FSA coal is currently at 50% discount to E-auction prices i.e. market price, which means there is still significant pricing power left with the company. Only 19% of the revenue is subject to the market price of coal and is cyclical in nature. If we were to model historically the lowest E-auction price of INR1,536/t (in FY17), the stock would still be trading at 4.3x EV/EBITDA, P/E of 9.2x and dividend yield of ~8%, which means valuations would still range between 35-40% discount to historical averages. 

Key concern #1: coal demand will be crowded out by renewable energy

• Indian power has huge potential for growth because per capita electricity consumption in the country is just 1/3rd of the world average. Currently, average energy load is ~140GW (equivalent to 100% PLF), which is expected to grow to more than 3x over time, while total renewable energy (RE) potential is 900GW, meaning an average energy generation of ~150GW. RE’s share in the power mix can reach maximum of 35% in India, which means that an average demand of 250-280GW will have to be met by coal. Thus, we believe coal demand will increase 2.5-3x over time even if the entire RE potential is fully tapped. Coal will continue to be the key driver of power generation in India. Though COAL accounts for 83% of the domestic coal production, it meets only 66% of the domestic demand, with a huge opportunity for import substitution. Therefore, we believe, demand for domestic coal will grow at a faster rate than power generation. 

Key concern #2: continuous selling by the promoters

• The Government of India (GoI) has sold ~INR378b worth of shares in the last five years. GoI can further reduce stake by maximum 20% (worth ~INR220b at current market cap). Future selling will be much less than in the last five years