Up 50% in 2022, will Nifty's black diamond continue to shine?

NEW DELHI: While many investors choose to ignore Coal India on the account of its PSU status and ESG concerns around fossil fuel when the world is moving towards green energy, the Nifty stock has turned out to be a black diamond for faithfuls as it has returned 50 per cent year-to-date.

Despite low e-auction volume and no increase in coal prices under fuel supply agreements (FSAs), Nifty's second best performer managed to surprise Dalal Street in its Q1 report card where its consolidated profit zoomed 179 per cent to Rs 8,330 crore and revenue jumped 39 per cent to Rs 35,092 crore.

"This strong performance was despite cost pressures and sets a very high bar for the coming quarters," domestic brokerage ICICI Securities said.

It has a target price of Rs 294 on the stock, which signals an upside potential of 34.5 per cent. A dividend yield of around 8 per cent is a cherry on the top for investors.

According to the brokerage, CIL will continue to perform well on account of high thermal power demand, high international coal prices and subsequent increase in demand for domestic coal, leading to higher e-auction premiums.

Centrum Broking, which has a higher target price of Rs 306 on Coal India, believes that it is a re-rating candidate as coal is here to stay for longer than what investors anticipate.

"Domestically, e-auction coal is still cheaper by 45-50 per cent from imported coal, providing upside risk to prices in FY23. Amid inflationary scenario, we believe that it will not be possible for Coal India to raise prices under FSA and thus we do not factor in price hikes under FSA in FY23 and pencilled in a 5 per cent hike in FY24 by when it can finalise wage negotiations too," it said.

During the June quarter, delay in increase of FSA prices (85 per cent total volumes) were more than offset by better coal grade management (resulting in higher FSA realisations) and strong e-auction realisations in wake of robust global prices. "Investors argue that Coal India’s costs are understated as wage revision is pending for non-executive employees (94 per cent of total headcount) since July 2021, overlooking the fact that FSA prices have also not increased for the last four and half years. Usually, upward revision in wages is followed by hike in FSA prices," analysts at Prabhudas Lilladher said.

With an accumulate rating, the brokerage has a target price of Rs 255 on the stock.

Global brokerage CLSA, which has a target price of Rs 250 on the stock, said the focus should now shift toward wage negotiations and that the PSU should look at diversifying from coal through forward integration.

PPFAS Mutual Fund's Rajeev Thakkar, whose flexicap fund has invested over 4 per cent of its AUM in the stock, said he does not view Coal India as a ‘buy-and-hold for decades’ kind of stock. Besides possibility of some price increase, he said there is a low probability of the valuation multiple reducing further and a high probability of some mean reversion in the valuation multiple.

Out of 24 analysts covering the stock, a majority of 18 have buy ratings with 4 sell ratings and 2 hold ratings.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)