Emkay Upgrades Coal India With ‘Buy’ Citing Sustained Demand Growth, Sees Up To 27% Upside – News18

Shares of Coal India gained more than 2 per cent in Tuesday’s intraday trade after brokerage firm Emkay Global Financial Services initiated coverage on the stock. Coal India shares hit an intraday high of Rs 440.85 apiece on the BSE.

Emkay Global initiated coverage on Coal India shares with a ‘Buy’ rating and target price of Rs 550 per share, implying an upside potential of more than 27 per cent from Friday’s closing price.

The brokerage house believes India’s large population and expansive scale make it unfeasible to phase out the use of coal for the next decade at least, while the country’s current growth momentum makes the wait for energy transition difficult; hence, the use of coal should actually accelerate until renewables scale up.

“A sustained coal demand tailwind coupled with the ‘high-growth, high-cash generation’ phase compels us to be buyers of the stock,” said Amit Lahoti, Senior Research Analyst at Emkay Global Financial Services.

Coal India is embarking on a multi-year value-creation journey with volume growth, strong margins, and free cash generation and the brokerage firm believes the company will succeed with sustained high returns on invested capital along with volume growth until the end of this decade.

“We expect the stock to re-rate on a multi-year view. We believe the stock is transitioning from a dividend-yield story into a holistic value-creation one,” Lahoti said in a note.

Coal production is estimated at 1 billion tonnes (BT) in the medium term implying a 9.2 per cent CAGR over FY23-27E. The brokerage firm’s analysis suggests that mining equities tend to follow earnings momentum closely and the market does not tend to decouple from the trend for long.

“Our earnings estimates for Coal India are ahead of consensus and we expect consensus earnings to capitulate (higher) as market expectations re-set following years of underperformance of the PSU energy space, often accompanied by a subdued outlook,” it said.

Coal India stock is trading at 7.9x P/E and 5.2x EV/EBITDA on FY25 estimates. The brokerage house expects the stock to generate a free cash flow (FCF) yield of 8.8 per cent and a dividend yield of 6.7 per cent.

However, key risks to Emkay Global’s investment thesis include faster adoption of renewable energy which could derail growth prospects of coal volumes; ESG narrative coming back in vogue, leading to exclusionary criteria with some investors; and disinvestment by the Government of India.

Coal India shares have given decent returns of nearly 20 per cent in the past three months, while the stock is up more than 109 per cent in one year.