Why UBS believes you should buy Coal India

In spite of the fact that it is likely to miss its billion tonne production target

Foreign brokerage UBS has initiated coverage on Coal India with a 'buy' rating despite believing that it is unlikely to meet its target of achieving a billion tonnes of production by 2020.

It believes that government action to allow for quicker completion of expansion plans and increased efficiencies will make up for any production shortfalls.

It also believes that the company remains relatively insulated from the fall in commodity prices which makes it a stock worth holding, UBS said in its 15th April Initiation of Coverage report authored by analyst William Vanderpump.



"...government reforms to cut delays in expansion projects (land acquisition /investment in railways) coincide with Coal India's capex increase to drive production and engage with third parties to raise efficiency and improve technology," it said.

The brokerage points out that the company has been protected from falling commodity prices because of the demand from domestic power producers who have starved for coal.

Its business model which ensures that coal prices are anywhere between 20-50% cheaper than international sources also have helped save it from the worst of the commodity price decline.



However, any margin improvement in a big way can only happen after the national wage negotiation due in the financial year ending in March 2017 (FY17).

"We believe Coal India matters to the government politically (more coal helps power sector profitability and hence consumers) and financially as a key part of its SOE divestment programme. We think it is in everyone's interests for the company's operational and share price performance to improve," it said.

UBS has a target price of Rs.470.The recommendation came when the stock was trading at Rs.392.3, implying an upside of 19.8% over the next twelve months. The stock was trading at Rs.373.25 at the time of writing.