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May 18, 2017 01:48 PM IST | Source: Moneycontrol.com

Will 'Shakti' strengthen stock price of Coal India?

Shakti aims to ensure that all the power plants are supplied coal as per the linkages provided.

Will 'Shakti' strengthen stock price of Coal India?

Jitendra Kumar Gupta

Moneycontrol Research

Lack of domestic coal availability has led India to rely on imports in the past.

Coal imports by Indian power producers surged 51 percent to around 65 million tonnes between FY14 and FY16.

That is likely to change with Shakti (scheme to harness and allocate coal transparently in India), the new coal policy for the power sector approved by the Cabinet Committee.

Shakti aims to ensure that all the power plants are supplied coal as per the linkages provided. The new long-term fuel supply agreements will be signed with competitive tariffs. It will benefit plants that have signed power purchase agreements on the basis of imported coal.

State-owned power companies have already cut their imports from 25 million tonnes in FY16 to 12 million tonnes in FY17 and are targeting near-zero imports this year.

Coal India could be a big beneficiary of this policy, especially with the government focusing on increasing its production. Coal imported by power generation companies is equivalent to 12 percent of Coal India’s production of 547 million tonnes in FY17. While the entire imports may not immediately fall to zero, a 10 percent growth in Coal India’s output will support a large part of the demand for domestic coal.

The same should reflect in Coal India’s earning, which is expected to increase to about Rs 20 a share as against analyst expectations of about Rs 15-17 per share in fiscal 2017. The stock has been a big underperformer in the past year. At the current price of Rs 277 a share, the stock is trading at 14 times its FY18 earnings which is reasonable considering the huge cash in the books, its monopoly status in the sector and zero debt.
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