Coal India: Is the improvement a blip or trend?

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Jitendra Kumar GuptaMoneycontrol Research

Those who took Coal India’s guidance with a pinch of salt would be hugely surprised with its recent operating performance. During the June quarter, the company achieved offtake growth of 12 percent followed by 15 percent growth in production. This is a fairly strong growth compared to its own past history of slow and volatile growth in production. Importantly, this also validates the management’s view of delivering strong growth in FY19, which it guided to at the end of FY18.

If the trend continues, the Street could turn positive leading to higher valuations, which are currently depressed. For the current fiscal, the management has set a target of about 630 million tonne of production, which translates into a year-on-year (YoY) growth of about 9 percent. This, along with 4-5 percent increase in realisation, could mean a 13-14 percent growth in revenue and strong jump in profits in the absence of one-time expenses such as wage revision.

Easing logistic issues

While demand exist, the management is working to improve evacuation. During April and May last year, the company loaded rakes at an average of 243 per day, which was up 23 a day compared to the corresponding period of last year. CIL has been looking for a mix or rail-cum-road transportation to ease supply. Railway connectivity is set to improve, with the 45 km Tori-Shivpur link likely to complete anytime. The same got slight delayed because of the heavy rains. The 53.5 km Jharsuguda-Barapali line is already yielding results. The benefit of both these projects would fully reflect in the second half of the current fiscal, helping the management evacuate higher amount of coals from its mines.

Scope for higher profitability

On the pricing front, CIL’s recent price hike and higher e-auction prices is estimated to result in a benefit of Rs 6,000 crore on an annualised basis, which should fully reflect in the current fiscal.

The full impact of coal evacuation and transport charges levied by CIL would add to profitability. Investors need to remember that there is a higher degree of earnings certainty as its earnings are less susceptible to volatility in international coal prices.

Valuations: Trading at an attractive yield

While fundamentals are improving, the stock may remain under pressure as a result of the government’s planned divestment. The government may sell at least 1.5 percent stale, which is equal to about Rs 2,470 crore based on current market price, in August. Investor expectations of lower sale prices and a possible discount to the current ruling prices of CIL may keep its shares under pressure. On the contrary, this could open a window for investors to accumulate as both fundamentals and valuations are quite supportive.

The stock is trading at 10 times its FY19 estimated earnings. Besides this, it has a cash on the books of Rs 30,000 crore along with dividend yield, which works out close to 7 percent of the current market price.

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