Coal India: There's good news finally

Growth of 16% in dispatches in August and 47% spike in July auction premiums are sentiment boosters

For a stock which has lost almost a third of its market value from the highs seen in August last year and having touched its all-time intra-day low of Rs 234 on August 11, 2017, things may be turning around. 

Coal India’s (CIL's) dispatch numbers for August reflect a 19 per cent year-on-year (y-o-y) growth, and helped the company’s year-to-date run rate improve to 6.6 per cent. Although production still lags (down 0.9 per cent during the first five months of FY18) as CIL continues to liquidate inventory, August’s production was two per cent ahead of its target. Analysts at Kotak Institutional Equities say coal dispatches should likely improve, given the improving profile of generation, and record low levels of inventory at power plants (eight days, as of August-end).

This is certainly good news for CIL, which has seen volumes take a hit since July last year as power plants resorted to destocking, a trend that continued almost till the end of CY2016. Consequently, CIL’s dispatches in FY17 grew by a tepid 1.7 per cent. 

Weak demand had also hurt e-auction realisations, which are also improving, thereby adding to the confidence. E-auction premiums spiked 47 per cent in July 2017, according to analysts, which is encouraging given that prices of imported coal have moderated recently while the rupee has been firm, making imports cheaper. 

Not surprisingly then, its share price surged more than three per cent to Rs 246.40 on Monday, with CIL emerging as the largest gainer among Sensex firms; the index ended 0.6 per cent lower. 

There’s some more news that should help ease concerns. Among the factors which have impacted Coal India’s financials over the past one year are mine downgrades and continued provisioning for wage increments. Though grade slippages remain mostly priced in at the current stock price, reports from a few days ago suggest a settlement has been reached with a 20 per cent hike.

The agreement, however, has got stalled. But, reasons for the disagreement include welfare measures and not the percentage hike. Thus, a 20 per cent hike is less certain.

Although it will be higher than 15 per cent anticipated by the Street, analysts say it points to a decelerating trend — a 50 per cent hike in 2007 and a 25 per cent one in 2012.

While the higher-than-estimated wage increase may result in some downward revision in earnings estimates, the overhang is behind, say analysts. 

The key triggers, thus, will be volumes and realisations, and if the recent trend continues, the stock price may see further recovery.

Analysts at Kotak Institutional Equities say the wage settlement for non-executive staff has likely settled on a 20 per cent revision and a potential increase in prices to account for higher cost, as suggested by the management, could offer fresh impetus to earnings and stock performance.