Corporate tax cut to boost Coal India's earnings, but overhangs remain

While lower tax rate and attractive valuations are positives, concerns on volumes, lower e-auction realisations and divestment could weigh on the stock

Even as the reduction in corporation tax rates provides a big respite to Coal India (CIL), the stock is yet to see a surge. The coal producer may see a 7 per cent rise in earnings following the reduced tax rates. However, its share price —trading at around Rs 193 prior to the tax cut announcement —  now stands at Rs 199-levels.
 
After the tax cuts, analysts at Kotak Institutional Equities reduced their effective tax rate for CIL to 30 per cent from 35 per cent. This led to a 7 per cent upward revision in earnings forecast. However, soft coal volumes, declining e-auction premiums, and the overhang of a stake sale by the government could keep the stock under check, despite attractive valuations.
 
The firm has consistently reported weak volume growth. In the April-August period, production reduced 2.8 per cent and sales fell 2.5 per cent, compared to the year-ago period. While declining volumes have kept Street sentiment subdued, analysts remain watchful on a pick-up in H2FY20.
 
They say the company’s larger subsidiaries — Mahanadi Coalfields (MCL) and South Eastern Coalfields (SECL) — have accounted for bulk of the sales decline, while continued low availability of rail rakes (down to 178 per day in August from 205 in July) also dampened offtake in August. Production volumes were hit by fatalities at MCL and SECL, and higher-than-normal rainfall  of late.

Considering the soft global coal prices, the more profitable e-auction realisations (linked to market prices) have continued to decline. During the June quarter, e-auction realisations had declined by 10 per cent year-on-year, and 22 per cent sequentially.
 
Concerns have also stemmed from expected competition, as the mining sector has been thrown open to private players. Nevertheless, analysts feel CIL may not feel much heat, given the country is already facing a shortfall in coal, and any rise in availability will first substitute imports.
 
Further, getting approvals, land acquisition, starting and ramping up new mines will take time. Analysts at Jefferies say they see limited impact of commercial coal mining in the next 3-5 years, as supplies will be largely back-ended. 
 
Finally, the overhang of the government’s stake sale plan remains. Despite attractive valuations on moderated earnings expectations, the stock’s performance (since the Budget) has been affected by the government’s aggressive disinvestment targets. Unless fundamental factors improve, the upside could remain capped.