CIL shares: Choice warns of 'value trap' despite attractive valuation

Choice Institutional Equities has initiated coverage on Coal India Ltd (CIL) with a 'Sell' rating, identifying the stock as a "value trap." Despite CIL's attractive-looking valuation multiples of 5x/9x/1x FY27E forward EV/EBITDA, P/E and EV/CE, the brokerage warns that these metrics may conceal more than they reveal.

The brokerage has raised concerns over CIL's core business model, which it describes as questionable due to discounted pricing and an unfavourable sales mix. According to Choice, CIL's operating strategy is not profit-driven, likening the company to "running on a treadmill to cover distance, resulting in no commensurate progress made despite running hard."

It further projects that from FY26E to FY29E, Coal India will invest a substantial Rs 80,000 crore, representing roughly 53 per cent of its operating cash flow on capital expenditures. However, the brokerage anticipates negative EBIT growth over the FY24-29E period. Additionally, CIL's net cash balance at the end of FY25 is noted to be Rs 32,800 crore, around 14 per cent of its current market capitalisation (m-cap).

Despite these figures, there are long-term provisions amounting to Rs 74,500 crore that need to be accounted for. Recent changes in accounting policies allow for the unwinding of the stripping activity provision, valued at Rs 58,000 crore as of the end of FY25, but this process could take between 5 and 15 years, according to Choice's analysis.

From a valuation standpoint, Choice employs a scenario-based approach with a base case target price of Rs 290 per share using the Dividend Discount Model (DDM). It also proposes an upside scenario valued at Rs 500 per share and a downside scenario at Rs 225 per share.

The stock's dividend yield is noted at around 7 per cent, which the brokerage finds optically high but unattractive due to the absence of other value drivers. They add that the current yield does not fully cover the equity cost of about 13 per cent.

Choice also underlines that a potential reversal in government policy to align coal prices with a profit maximisation motive could pose a risk to their 'Sell' recommendation.

Meanwhile, shares of CIL were last seen 0.33 per cent lower at Rs 387.10 in Monday's trade.