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This article is more than 2 year old.

Here's why Motilal Oswal has picked this maharatna company as its contrarian bet

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Motilal Oswal has picked Coal India Ltd (CIL) as its top contra bet due to attractive valuations and dividend yield despite the maharatna public sector company's shares correcting nearly 18 percent so far this year and more importantly, amid regulatory shift. Contra bets are stocks and sectors that have long-term potential despite near term headwinds and require the appetite for high risk.

Here's why Motilal Oswal has picked this maharatna company as its contrarian bet
Motilal Oswal has picked Coal India Ltd (CIL) as its top contra bet due to attractive valuations and dividend yield despite the maharatna public sector company's shares correcting nearly 18 percent so far this year and more importantly, amid regulatory shift. Contra bets are stocks and sectors that have long-term potential despite near term headwinds and require the appetite for high risk.
shares traded flat on Monday, quoting at Rs 198.90 apiece on NSE at 11.02 am, after opening at Rs 198.10. In the last one year, the maharatna firm's shares have fallen almost 31 percent despite a good dividend pay-out history and robust cash reserves.
Coal India shares have gained over 7 percent in the last one week after the Union cabinet approved 100 percent foreign direct investment under the automatic route in coal mining and also in the creation of associated infrastructure.
“Coal India (COAL) has witnessed significant de-rating over the past 2-3
years, despite its EBITDA having doubled from FY17 levels ... Free cash flow generation remains strong, which allows COAL to distribute healthy dividends. We believe that Coal India’s volume growth will continue
on India’s low per capita electricity consumption,” Motilal Oswal's analyst Siddhartha Khemka said in a research report dated September 5.
Coal India's volumes likely will grow at nearly 5-6 percent compound annual growth rate (CAGR) over FY19-21 as there exists a “massive opportunity for import substitution, Khemka added.
Currently, Coal India meets only around 68 percent of the domestic demand despite accounting for nearly 82 percent of coal production, leaving a massive scope for imports. With India depending on coal for nearly 75 percent of its electricity requirement and the country's per capita electricity consumption just a third of the world average, it has a huge potential to grow, which in turn should drive coal demand.
Apart from a strong presence across the sector with India’s energy mix unlikely to change majorly in the near future, Coal India also has the advantage of strong pricing power and operational leverage due to lower wage bill accounts.
However, the high divestment target of the Centre for FY20 with further stake sale in Coal India is a possibility and could remain an overhang on the stock price, the report adds. At present, the Centre holds around 71 percent stake stake in it. Yet another risk comes from production issues at CIL's key subsidiaries such as SECL and MCL which could impact its performance and pose downside risks for its FY20 target.
Another brokerage Emkay Global Financial Services has a buy recommendation on Coal India with a long-term target price of Rs 296.
“The initiative is a welcome move but we are still some time away from merchant coal mining, given the overarching presence of Coal India, shortage of rakes, time taken for land acquisition and various approvals from local, state and central governments. We do not see any near-term risks to Coal India because of this decision,” it said in a research report late August after the Union cabinet decision.
Coal India reported a 22.2 per cent increase in consolidated profit at Rs 4,629.87 crore for the quarter ended June 30, mainly on higher income. The company had posted a consolidated profit of Rs 3,786.44 crore in the year-ago period. CIL's consolidated income increased to Rs 26,089.20 crore from Rs 25,359.30 crore in the year-ago period. Coal production in April-June quarter stood at 136.94 million tonnes (MT) as compared with 136.85 MT in the year-ago period.
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