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Sep 13, 2017 12:51 PM IST | Source: Moneycontrol.com

Is the worst over for Coal India?

In its post listing history, FY17 was possibly the worst year for Coal India as the stock got hammered with investors worrying excessively about poor demand, lower coal prices, grade slippages and the huge impact of wage revision.

 
 
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In its post listing history, FY17 was possibly the worst year for Coal India as the stock got hammered with investors worrying excessively about poor demand, lower coal prices, grade slippages and the huge impact of wage revision.

But contrarian investors could now possibly look for better days with Coal India staging a sharp rally to Rs 257 from the recent lows it made last month at around Rs 238 per share, but still 30 percent off from the peak (Rs 330) it made in March 2017.

What leads to the optimism?

The Street was taken by surprise with 19 percent year-on-year production growth posted by Coal India in the month of August 2017. While these growth figures have a certain component of statistical pop-up because of the low base of last year, what is worth noting is that the underlying growth trend is expected to remain positive.

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One of the issues that grappled Coal India this year was lack of volumes given the slowdown in power generation and coal demand. However, that is changing as is evident from the August volume figures that saw Coal India producing 44 million tonnes of coal.

Not just the monthly jump, during January-August 2017, the company has been able to dispatch 376 million tonnes - the growth of 6.2 percent compared to last year. This is far better than 2 percent dispatch growth made in the corresponding period of 2016.

Is it sustainable?

The latest IIP numbers suggest that electricity generation grew 5.4 percent in July 2017 as against 2.2 percent in June 2017. Post demonetization and initial impact of GST, power demand from the industrial sector appears to be improving.

To back this, the latest thermal power generation data suggest 4.2 percent growth in generation in the month of July as against a contraction of 1.6 percent in June 2017. During the month of August 2017, India's thermal power recorded a PLF of 58 percent as against 54.38 percent in July 2017 and 51.6 percent in the corresponding period of last year.

Wage bill: In the price

Apart from the demand, the market was also worried about the impact of wage revision. Coal India, which has close to about 3.7 lakh employees, had agreed to a 20 percent wage hike as against the original demand from the Union of 50 percent wage hike. This is expected to have an impact of about Rs 6000-7000 crore, which on the higher side translates to Rs 120 per tonne or 9 percent of the current realization of Rs 1340 per tonne. Since about half of this is already provided, the incremental impact would be to the extent of Rs 3000 crore.

While wage revision could drag profits down, the company is making its efforts to increase production, which is already seen in the improving monthly volumes. The company is also looking to bring down the cost of production by closing down the loss-making underground mines. Estimates suggest that 117 underground mines incur losses close to its annual profits. In the first five months of FY18, the company has already closed 12 such mines and is aiming to do more resulting in cost savings.

E-auction: scope for price hike

The pricing environment, too, is improving. Globally, coal prices have moved up leading to higher premium (close to 33 percent in July) that the company commands over the notified prices at which the company has to sell coal to the priority sector. To that extent, E-auction volumes, which are close to being about 120 million tonnes or about 22 percent of the total offtake in FY17, would make a greater contribution to profitability this year.

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What is in the price?

Moneycontrol Research had initiated a buy at Rs 279 on May 2017, as we believed that the stock was attractively priced even though the market was excessively worried about the short-term events. What is different today is that the business environment has changed for the better providing us more reasons to remain convinced. The company has a market capitalization of close to Rs 1,60,000 crore. If we adjust for the cash in the books of close to Rs 40,000 crore, the company is available for Rs 1.3 lakh crore. At the current price, the free cash flow yield works out to close to 10 percent along with a dividend yield of close to 6.5 percent.

For more research articles, visit our Moneycontrol Research Page

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