Coal India: 4 reasons why Jefferies sees share price correction as an opportunity to Buy

Coal India Share price that had seen sharp correction of 13% from closing highs seen in mid February, however rebounded well on Thursday gaining more than 2% in the opening trades. 

The weakness in the market had been one of the reasons for some investors resorting to profit booking said analysts. Nevertheless  analysts as those at Jefferies India Pvt Ltd see the steep correction in the Coal India share price as an opportunity to Buy. 

Four reasons why Jefferies sees correction as an opportunity to Buy

Strong Volume uptick-  Coal India has been reporting good volume growth during FY24.  Coal India's dispatch volumes that had fallen 6% during FY19-21 period, however rebounded growing 10% CAGR (Compound annual growth rate) between FY21-23 and 9% during FY24 till date.

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 The country's economic growth momentum remains strong and power demand too is rising regularly leading to strong rise in coal demand for thermal power production. Jefferies Utilities analyst utilities project thermal power plant Plant load factors rising to 79–80% by FY27, and that thermal capacity additions will increase to 7–17 giga watt (GW) per year over FY26–30, up from a run-rate of 2–5 GW  a year in the majority of previous years. Jefferies factors in factor in an 8% YoY increase in Coal India's dispatch volumes in FY24, followed by a 6% CAGR over FY24–26.

Fall in e-auction premiums is largely behind-In a recent investors call Coal India had indicated that the e-auction price premium over linkage coal has declined from 117% in third quarter FY24 (FY23: 228%) to 36-50% in January-February led by increased supply of e-auction volumes. Analysts at Jefferies estimate e-auction price premium of 50% during FY25–2026 compared to an average of 63% seen in  FY11–22 .

Strong Earnings outlook-  The earnings per share for Coal during Fy23 rose 63% year-on-year and was much better than peak EPS of RS 28 clocked by Coal India during FY10-22. The same was helped by rising global coal prices, rising e-auction realisations and volume growth. The analysts expect EPS in FY24 rising to ₹51.

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Favorable Valuations- During November 2023  to mid-February 2024, Coal India outperformed the Nifty-50 by 40% and total share holder returns stood at 54%. However post correction the price to earnings ratio had become reasonable at 8.3 times FY25 estimates. 

Also Coal India  is currently trading at a 57% discount to the Nifty-50 PE, compared to an average of merely 16% discount between 2011 and 2018.  Jefferies target price of ₹520 indicates to a more than 20% upside from current levels

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions