Weekly Tactical Pick: Risk reward in Coal India at a favourable juncture

Moneycontrol Research

A stock with a reasonable valuation and no balance sheet and promoter risk is likely to survive well when the going gets tough. One such company is Coal India (CIL). This debt-free company is sitting on a cash and cash equivalent of about Rs 30,000 crore. At the current market price of Rs 277 per share, it is attractively priced around 11 times its FY19 estimated earnings, with a dividend yield of 7 percent.

Back on the growth track While its balance sheet and valuation lends great comfort, the company is performing better than the expectation on the business front. Till September, its production volumes grew 10.6 percent and despatches saw 8.1 percent growth, which is far better than last year.

Thankfully, with evacuation issues (new railway line getting operational) now easing, volume growth is expected to remain strong. The management is confident of achieving FY19 production of around 630 million tonne, a growth of 11 percent.

Past issues addressed

Most issues relating to wage revision are now behind it as the company has already provided for an increase in wages. So, profitability in coming quarters will improve in the absence of the one-time provision required for wage arrears.

Recently, the management initiated a price hike. Contribution of e-auctioned coal is also increasing in addition to evacuation and logistics charges that are now being levied on customers. Realisations, therefore, are expected to remain high, leading to better earnings.

Spot e-auction prices were hovering at a premium of around 90 percent in recent months, which points to higher realisations from the spot market as well as pricing environment in coming months.

Last fiscal, earnings were impacted because of higher cost and volume pressures. But this fiscal, CIL is expected to put up a strong showing with net profit of about Rs 16,000 crore and an earnings per share of Rs 25, a growth of 130 percent compared to last year.

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