Is Coal India Undervalued? Exploring Key Valuation Metrics

In this article, we will discuss:

• Coal India Stock Price: A Closer Look at What Analysts Expect
• Recent Corrections in Coal India’s Stock Price
• Decoding the Fundamentals of Coal India’s Stock Price
• The Bottom Line: Is Coal India Undervalued?

In the weeks following the presentation of the interim budget 2024, the energy sector has been in focus for various reasons. While renewable energy stocks have found their place in the spotlight because of the Indian government’s rising emphasis on green energy sources, investors have also been watching traditional energy stocks closely. This can be traced back to the government’s decision to increase India’s coal gasification capacity by 100 MT by 2030. 

After this announcement, traditional energy stocks like Coal India have been in the news often. If you are planning to diversify your portfolio to include this conventional energy company, you need to do more than just track the Coal India stock price on the bourses. You must also assess if the company is undervalued before taking a long position in the stock.

Coal India Stock Price: A Closer Look at What Analysts Expect

In the pre-budget and post-budget weeks in FY24, Coal India has remained a hot pick among analysts as a long-term buy. In the past six months, Coal India’s stock price has increased by over 100%. Furthermore, the company also has many other factors working in its favour, such as the following:

• Strong Financial Performance and Return Ratios

Coal India has also posted strong financial numbers that highlight the company as a compelling buy for investors. Analysts expect this PSU to maintain a 30% EBITDA. These factors, when coupled with the company’s consistent dividend payout ratio of 50%, make it a promising investment that could offer attractive returns. 

• Ambitious Production Targets and Volume Growth

By 2025, Coal India aims to ramp up its coal production to meet the country's power needs 24/7. The company also has plans to produce 1000 million tonnes by FY26. Thanks to recent growth and investments in infrastructure and technology, it's well on its way to hitting these targets. This growth is a big reason analysts are calling to invest in Coal India.

• Integral Role in India’s Energy Mix

Even as we move towards renewable energy, coal remains a major source of power in India as it contributes to over half of the country’s energy needs. Demand for this fossil fuel is set to increase to 1.5 billion tonnes by 2030. Coal India, which supplies a large part of this demand, stands to gain significantly in the long run, making it a solid investment.

Recent Corrections in Coal India’s Stock Price

Despite the upsides driving a generally optimistic outlook, Coal India’s stock price dipped by over 4% in the intraday session on February 20, 2024. This correction occurred days after the stock hit a 52-week high of ₹487.75 on February 16. This may be driven by reducing e-auction premiums. 

So, amidst this uncertain phase, traders and investors may be in a dilemma about whether to buy, sell or hold the stock. In case you are considering a long-term approach, you need to look beyond temporary corrections in Coal India’s stock price and analyse the stock’s fundamentals to assess if it is overvalued or undervalued. 

Decoding the Fundamentals of Coal India’s Stock Price

Valuation is an important part of deciding if a long-term investment could pay off. It involves assessing a stock’s intrinsic value and comparing it with the current market price. An undervalued stock may be a more attractive investment because its price could appreciate over time, as the market perceives the true value of the company. 

So, how does Coal India’s stock price compare to its true value? Let’s analyse Coal India’s key financial ratios and see how they stack up against the company’s peers to find the answer. 

• Price-to-Earnings Ratio (P/E Ratio)

The P/E ratio is calculated by dividing Coal India’s stock price by the company’s earnings per share (EPS). A lower P/E ratio suggests that the stock might be undervalued or that investors have conservative expectations about the company's future earnings growth compared to the sector average.

As of February 22, 2024, Coal India’s P/E ratio comes in at 9.34. When compared with the sector P/E of 25.18, this is fairly low. Essentially, this indicates that relative to its earnings, Coal India's stock is priced more modestly compared to the average valuation of the sector. When comparing Coal India's P/E ratio to that of its peers, it appears to be among the lowest. This suggests that the company may be more attractively priced compared to others in the same sector. 

• Price-to-Book Ratio (P/B Ratio)

The P/B ratio is computed by dividing Coal India’s stock price by its book value per share. A high price-to-book ratio means that the company is trading at a premium when compared to its book value. 

For Coal India, the P/B ratio of 4.73 is higher than the sector average of 3.31. This suggests that the company is valued more richly by the market in terms of its book value compared to the average company in the sector. 

Even among its peers, Coal India appears to have a higher P/B ratio than the other companies listed — except for KIOCL. Before you invest, you need to carefully analyse the reasons behind this premium valuation and assess whether Coal India's operational performance, asset quality and growth prospects justify its higher market valuation compared to its book value

• Dividend Yield 

Coal India has a dividend yield of 5.45%, which is higher than the sector dividend yield of 2.70%. Within the sector, it is higher than most of the company’s competitors, except for Vedanta. Since the dividend yield is inversely related to Coal India’s stock price, a moderate-to-high dividend yield such as this can imply that the stock's price is low compared to how well the company is doing. Or, in other words, it could be a sign of undervaluation. 

• Earnings Yield 

The earnings yield is essentially the inverse of the P/E ratio. It gives you insights into the amount of earnings generated per rupee invested in the company. At 10.71%, Coal India offers a higher earnings yield than its peers. This means that investors are getting more earnings for each rupee they invest in Coal India. It could indicate that this is a potentially undervalued stock or at least one that offers relatively attractive earnings when compared to its price.

The Bottom Line: Is Coal India Undervalued?

While Coal India’s P/B ratio is slightly on the higher side, other valuation metrics like the P/E ratio, dividend yield and earnings yield all indicate that the stock could potentially be undervalued. This is why most analysts are currently opting for a buy signal for this stock. 

If you want to add Coal India to your portfolio, you can build on this analysis and conduct additional research before making an informed decision. In case you have a more short-term outlook, you can perform an in-depth technical analysis to assess whether to buy or short the stock. Whichever option you choose, Samco’s trading app can help you perform the required research and capitalise on market opportunities as and when they arise.

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