Coal India's near-term prospects hinge on price increases

Govt is committed to raising production and enhancing efficiency but these benefits will take some time to accrue

Coal India had hit a 52-week high of Rs 423.85 on June 11 in anticipation of faster clearances and consequent rise in output. The scrip has since cooled and trades at Rs 373. The production and sales data till August, below target, also fails to impress.

Though the government might be doing its bit, production growth is not likely to come soon. With volumes growing marginally and below target, the fuel supply agreement (FSA)-based price increases will be important to drive performance and provide a trigger to the stock price. In this backdrop and given the consensus one-year target price of Rs 395, from analysts polled on Bloomberg since the declaration of results, the upside for the stock is limited.

For the first five months ending August, Coal India’s production and dispatches at 175.9 million tonnes and 194.9 mt, up 5.1 per cent and 3.4 per cent over a year before, respectively, came below the targeted 183.9 mt and 209.2 mt. The company has targeted sales volumes at 520 mt in 2015-15 but analysts estimate it to achieve only 495-500 mt, up five to six per cent over the dispatch of 471 mt achieved in FY14. If the output and dispatch targets are to be achieved, it would require a faster pick-up in the coming months.

The government has given adequate concessions industry to boost production but analysts believe evacuation of the coal is a bigger challenge. Analysts at HSBC say this is the most difficult part of a production increase. It is the rail network that can boost volumes and laying new tracks and networks at new sites is likely to take time. The analysts say, “We believe that in two to three years, Coal India’s production increase is likely to be much better than its track record of the past few years.”

Thus, volumes are not likely to move up in a hurry. Other possible dampeners for the stock are the proposed stake sale by the government and the outcome of the Supreme Court’s verdict on coal mine allocations. Analysts say it is too early to draw any inference on what the court’s decision will be but if there is a large-scale de-allocation of mines, they will be reviewing the impact on Coal India’s e-auction volumes, which command better returns than what is supplied under FSAs. The government is also contemplating sale of stake to garner funds. This can add further pressure on the stock. Further, if workers protesting against divestment go on strike, as has been the case during previous occasions, expect some impact on production.

Given these concerns and the fact that analysts are not looking at a sudden upsurge in production and sales volumes, price increases by Coal India, anticipated for long, are seen as the only trigger for the stock in the near term.

Long-term investors can accumulate the stock at declines, however, since the company will be a winner once policy decisions taken by the government start reaping results. Efforts to enhance efficiency, including by a break-up of the company, will add to shareholder gain.

Analysts at Prabhudas Lilladher maintain a positive stance on the stock.