The Indian Railways on Wednesday announced a deal with Coal India for the procurement of 2,000 high-capacity wagons. The move is aimed at ramping up coal loading for Indian Railways that is in the midst of a shortfall in freight traffic and also to help the coal producer meet its production targets.
As per the MoU signed between the two, the wagons will be procured by railways on behalf of Coal India for exclusive use in the evacuation of coal traffic from the mines of Coal India.
Tarang Bhanushali of IIFL says the move is a positive for Coal India and expects a target price of Rs 440 on the stock. He further explains the merger will help lower coal prices as now the e-auction demand will decrease over more availability of rakes.
Below is the verbatim transcript of Tarang Bhanushali’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.
Latha: Yesterday, we got news that Coal India is tied up with the railways for rake delivery. Is this a special positive or was that factored in since Anil Swaroop for the longest time has been telling us that these are in the works.
A: This is of course a very positive thing for the company. As you know that the transportation of coal has been impacted because of unavailability of wagons in the past, so a very good measure and what I read from the media news is that this would be high capacity wagons which would be carrying around 25 tonnes against the 8-10 tonnes. So, the transportation would be quite easier and the quantity would be quite bulkier which I think would be a very good step considering that the company is planning to double its output over the next five years.
Sonia: This is a big positive because poor rake availability has been the biggest reason for the lower growth in the off-take. So, given that they have signed a memorandum of understanding (MoU) for 2,000 high capacity wagons, which means 33 rakes, how does that translate into revenues for Coal India?
A: I think what will happen is that, what we have seen is that the company has been building up inventory over the last few days because of lower off-take and lower rake availability, so what will happen is that since the rake would be available, people will start purchasing and though it would be a positive step towards volume growth but it would not give a booster to the revenue as such. It would be a marginal boost only to the volume. In fact, people were questioning on the doubling of output. So, such steps would confirm our belief in the steps taken by the government.
Latha: Okay, it will not increase revenue? Then why is it a positive at all for the stock?
A: I am saying that we have already factored in a volume growth, but that would be through the e-auction route or by the road route. So, this would be very much like lucrative for the power producers to purchase coal from Coal India and not import it since rates are already available and at a cheaper cost. So, the incremental volume sales which we were building in would be easily passed through to buy this.
Sonia: Do you track NTPC because it seems like NTPC stands to gain the most because coal now becomes available to them.
A: No, I do not track NTPC.
Latha: None of the power companies like Jindal Steel and Power (JSPL) or any of them?
A: No.
Sonia: Will this higher supply of coal eventually put any pressure on prices you think?
A: Yes, to some extent, because what used to happen is that due to unavailability of rakes, the coal was sold through e-auction and that was transported through the road route. Now, since rakes would be available, the power producers would easily procure the coal through rail route and the demand on the e-auction route would be lower. So, the prices which have been quite subdued in the last six months, there we would see some impact going through.
Latha: What is your target price on Coal India?
A: Rs 440.
Sonia: And you did say that you have factored in volume growth through the e-auction route, so what exactly is the volume growth that you are looking at for Coal India by the end of next year?
A: We are factoring around volumes of 580 million tonne this year.
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