Motilal Oswal sees 21% upside in Coal India, revises target price to Rs 700

Coal India stock price forecast: Brokerage firm Motilal Oswal has projected an upside of 21 percent for Coal India and upgraded the target price at Rs 700 per share. The brokerage believes that the production outlook of Coal India appears strong led by powerful volume growth over the ensuing years driven by increasing demand from the power sector along with strategic enhancements in coal dispatch mechanisms.

Strong Volume Growth and Power Sector Demand

Coal India has maintained steady production, especially this year. It saw 46.1 mt of production in August 2024-12 per cent lower year on year, with erratic monsoons in key coal-producing states like Odisha, Jharkhand, and West Bengal. However, for the April-August 2024 period, the company's production stood at 290 mt, up 3 per cent year on year, while dispatches were up 1 per cent at 308 mt.

The thermal power industry remains the major driving force for demand, with 81 per cent of the total dispatches of Coal India going to that sector during April-August. The company's target is a production level of 838 mt by FY25 and e-auction volumes at 15 per cent of total dispatches. Growth in volumes can thus be expected to be supported by Power Demand growth on the back of the rise in India's GDP . Besides, thermal generation capacity is still increasing - 5.7GW in FY24 and another 29.4GW is likely by November 2028.

Higher E-Auction Volumes to Boost Realisation

The strategy at Coal India to increase the proportion of its e-auction volumes will help improve overall realisation. About 70mt were sold via e-auctions in FY24 at a 99 per cent premium over FSA prices. However, though e-auction premiums fell to 58 per cent in Q1 FY25, the increase in e-auction volume share helped offset partly the impact. Looking ahead, Motilal Oswal believes the e-auction premium would now stabilise at about 60 per cent on buoyant market demand supported by recent global trends.

Record Capex to Enhance Infrastructure

To sustain growth, Coal India has significantly ramped up its capex and has budgeted Rs 16,700 crore for FY24, besides plans to invest Rs 17,500-18,500 crore in FY25 and FY26. Money so invested will be spent on improving evacuation infrastructure, adding new railway corridors, and setting up new coal washeries. This expansion will not only support Coal India's volume growth but also raise the quality of coal supplied to the market.

Valuation and Financial Performance

Motilal Oswal has reiterated its revenue and EBITDA estimates for Coal India for FY25 and FY26, with revenues forecasted to reach Rs 1,49,700 crore for FY25 and Rs 1,69,400 crore for FY26. Stock is trading at an attractive 4.7x FY26E EV/EBITDA. Given the dominant domestic position of Coal India in the coal sector and favourable demand prospects, the brokerage firm has reiterated its "Buy" rating while upgrading the target price to Rs 700. This implies a significant upside over the current Rs 497.