Shares of Coal India hit a fresh 52-week high at Rs 300.4 apiece. Brokerage house Nuvama Institutional Equities said that the coal player offered the triple benefits of volume growth, improved e-auction prices, and possible all-time high dividend in H2FY24.
“Despite the stock rallying ~25 percent since Sep-23, we expect further upside potential of 35 percent within a year, excluding the dividend of Rs 30 in H2FY24E and Rs 25 in FY25E,” said the brokerage.
As the monsoon recedes and hydro/wind generation falls, Nuvama said that demand for thermal power is set to rise further in H2FY24. The rise in global coal prices, coupled with an uptick in industrial activity, pushed up the e-auction premium to 106 percent in the second quarter, up from 54 percent in the first fiscal quarter.
The trifecta of benefits prompted Nuvama to increase its 12-month target price to Rs 389, up from Rs 361. From the closing price of Rs 288 apiece on October 9, this offers investors a 35 percent upside.
As of 1 p.m., shares of the company were trading near the day’s high, at Rs 298.85 per equity share. Coal-based power generation increased by 16.5 percent YoY in September amid rising temperatures, coupled with a shortfall in hydropower output. “With demand for thermal coal expected to stay elevated, we believe CIL is geared up to meet the rising coal demand,” said Nuvama.
Dividend projections
Coal India’s current dividend yield is 8.06 percent. In the past 12 months, CIL has declared an equity dividend amounting to Rs 24.25 per share. Nuvama raised the DPS estimate from Rs 20 to Rs 30 in FY24, and Rs 35 in FY25. “We highlight that FY24E DPS of Rs 30 could be interim and should be paid out in H2FY24 (annualised dividend yield of ~21 percent),” said the brokerage.
A reason this could be possible is that in a pre-election year, Coal India is likely to generate free cash flow of Rs 220 billion/Rs 195 billion in FY24E/FY25E. “With higher volume, partial FSA price hike (on 30% of volume) and cost peaking out, we believe CIL would continue to generate EBITDA much above average in the foreseeable future,” added Nuvama.
Source: Money Control