Decent growth in February volumes unlikely to fire up Coal India's stock

The pressure on e-auction premiums, commodity prices led by coronavirus spread and stake sale overhang remain key concerns

Even as markets were choppy on Monday, a decent growth in February coal volumes lifted Street sentiment towards Coal India’s stock pushing it up by over a per cent. The company had consistently reported a decline in volumes during the first half of FY20. Even though some improvement has been reported from the month of December, Q3 still had seen sales volumes decline by 8 per cent year-on-year. So, the latest numbers are some respite.

In fact, February saw a better recovery with production volumes increasing by 14.2 per cent year-on-year to 66.3 million tonnes (MT) while sales volumes grew 6.8 per cent year-on-year. A big positive is that the company’s larger subsidiaries, which had faced some problems earlier, are now driving sales and production. South Eastern Coal Fields Ltd (SECL) and Mahanadi Coalfields Ltd (MCL) saw 11.9 per cent to 19.2 per cent year-on-year growth in production. MCL also reported an 11 per cent growth in sales. Overall, the production run-rate in February at 66.3 MT, showed a marked improvement as compared to 43 MT achieved in 9MFY20.

While the improved performance is positive, the Street will remain watchful on the sustenance of the trend. Coal India is looking to aggressively ramp-up production/dispatches to bring respectability to its full-year numbers, however analysts say that a recovery in demand from power sector will be key to overall improvement. Notably, coal inventory across plants in India increased to 21 days amid weak power demand. An improvement in demand holds key to the company’s prospects as the power sector accounts for a large chunk of Coal India’s sales. 

Moreover, the market would also be looking at how coronavirus impacts international coal prices further. The same also remains crucial for Coal India’s more-profitable e-auction prices. During the financial year, e-auction premiums too have remained weak along with production numbers. E-auction premiums had declined to 51 per cent in January 2020 from 67 per cent in December 2019. 

Besides the caution on fundamentals, the overhang of stake sale by the government too is weighing on Street sentiment. It is thus not surprising that despite analysts giving buy ratings and valuations remaining cheap, the stock had fallen to its all-time low a few days back. Analysts at ICICI Securities post Q3 performance while valuing the stock at 5x FY21E adjusted EV/EBITDA had arrived at a target price of Rs 200, while those at Kotak Institutional Equities have recently given a target price of Rs 280 looking at decent valuations and dividend yield of 12 per cent.