Coal India’s stock price recently dropped by 13% from its mid-February highs but bounced back by over 2% on Thursday. Analysts believe this drop was due to market weakness, prompting some investors to book profits. However, Jefferies India Pvt Ltd sees this correction as a buying opportunity for several reasons.
- Strong Volume Growth: Coal India has shown robust volume growth in FY24. Dispatch volumes, which declined by 6% between FY19-21, rebounded with a 10% CAGR between FY21-23 and 9% in FY24 so far. This growth is fueled by the country’s strong economic momentum and increasing demand for coal in thermal power production.
- Decline in E-Auction Premiums: Coal India mentioned in a recent investor call that the premium of e-auction prices over linkage coal has dropped from 117% in Q3 FY24 to 36-50% in January-February. This decrease is due to higher e-auction volumes. Jefferies analysts estimate a 50% premium during FY25–2026 compared to the previous average of 63% from FY11–22.
- Positive Earnings Outlook: Coal India’s earnings per share (EPS) increased by 63% YoY in FY23, surpassing the peak EPS of ₹28 during FY10-22. This growth was supported by rising global coal prices, higher e-auction realizations, and volume growth. Analysts expect the EPS to rise to ₹51 in FY24.
- Favorable Valuations: After its strong performance from November 2023 to mid-February 2024, Coal India’s price-to-earnings (PE) ratio became reasonable at 8.3 times FY25 estimates. Currently, it trades at a 57% discount to the Nifty-50 PE, compared to an average of only 16% discount between 2011 and 2018. Jefferies’ target price of ₹520 suggests over a 20% upside from the current levels.
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