Coal India awaiting more triggers

Analysts expect it to raise prices this quarter to offset rising costs; faster clearances seen for project plans but output rise still seen as a challenge

Coal India has been in the news. While it missed the production target for 2013-14, on the positive side it is reported to have allowed price increases at one of its subsidiaries, which analysts see extending to the others. This bodes well and, at a time when international coal prices remain weak, is remarkable. Aided by expectations of improving profitability and better production, the stock has risen 19 per cent since end-February.

Though the Street is expecting a turnaround in Coal India’s production after the elections, as a new government clears projects faster, there are challenges.

Some analysts are sceptical about a significant rise in output soon; others see grade slippages impacting realisation. The latter are awaiting the price increases, after which they will review their estimates. The more optimistic have stock price targets up to Rs 340; the more bearish have it as low as Rs 241. The consensus target price of 21 analysts polled on Bloomberg since March is Rs 308, implying limited upside for the stock. Investors should, thus, await a correction or triggers like price rises or output gains to buy the stock.

Output challenges
Production was 462.5 million tonnes in FY14, 2.3 per cent higher than the 452.2 mt in FY13. However, the year’s target had been 482 mt. Again, while offtake at 471.5 mt was 1.6 per cent higher than the 464.1 mt of FY13, it was lower than the target of 492 mt. CIL attributed the miss to Cyclone Phailin and law and order problems in some mining belts. It expects FY15 production and offtake at 507 mt and 520 mt, a rise of about 10 per cent each.

From the record, these seem ambitious, given the issues on regulatory clearances and land acquisition. There are several issues even for expansion of existing fields, say analysts at Motilal Oswal. Still, they expect the growth in output to be higher in FY15. Analysts at Nomura see the company achieving 492.8 mt and 498 mt, implying around six more from the actual levels in FY14.

In the medium term, too, analysts are hopeful. They see an improvement in output with a change of government at the Centre and faster regulatory clearances.

Analysts at Ambit Capital, based on their mine-wise analysis, see Coal India clocking a 5.1 per cent compounded annual growth rate in production during FY14-17. This would be much higher than the 1.6 per cent growth during FY10-14. They attribute the estimate to a faster pace of environmental and forest clearances in the past 12 months, with a further boost from a  Bharatiya Janata Party-led coalition taking charge at the Centre after these elections. However, they feel achieving annual production growth of over five per cent will be challenging — regulatory clearances and land acquisitions are still pending for three key railway lines projects.

Price rises
Reports suggest the company has raised the price of certain grades of coal from its Rajmahal coal mine, belonging to its Eastern Coalfields subsidiary. This would add to profitability, say analysts. However, this is only eight per cent of total production and to take care of increasing costs, grade slippages and higher fuel supply agreement supplies, price increases are needed, it is felt, across the board. Analsysts expect this to happen in May-June, as was the case last year. However, the benefits last year were somewhat negated by grade slippages.

Analysts at Nomura, taking into consideration a revised assessment for grade slippage and impact of the mining Bill, have cut their estimates for earnings per share for FY14/15 by six per cent and two per cent, respectively. They have also marginally lowered their 12-month target price to Rs 315 (from Rs 320). Abhisar Jain at Centrum Broking says at the current prices, the stock looks fairly valued. He has a ‘Hold’ rating, with a target price of Rs 280.