Coal India shares up on higher profit, price increase

Shares of Coal India Ltd (CIL) gained as much as five per cent today after the company reported better-than-expected fourth quarter earnings and announced an increase in product prices for the first time in two years. The stock, which touched Rs 329 in the early trading today, closed at Rs 322.25, up 3.01 per cent from its previous close.

CIL, the world's largest coal producer, in a late evening announcement on Monday reported a 35 per cent increase in net profit. However, market analysts said the rise in the stock price was largely driven by the five per cent hike in coal prices announced today.

CIL sells coal at a discount due to its fuel supply agreements with power companies, which is a concern for investors. In the light of this, the company's decision to hike prices has raised hopes of increased profitability.

"A hike in coal price will give the company tremendous amount of leverage in terms of profitability. This is despite the overhang of a divestment or buy-back by the government which may see cash moving out of the company," said Sonam H Udasi, senior vice-president and head of research, IDBI Capital.

But not everyone is impressed. "The prices have been increased only on low-grade coal which will not translate into much of a difference. Prices of e-auction coal will also have to improve for the company to see significant gains," said Sandeep Gupta, vice-president and head-equity advisory at Motilal Oswal Securities. He explained the e-auction coal prices internationally stand at $2,300/tonne, down from $2,800/tonne. "These prices have to move back up to $2,800, only then will the company see good numbers."

The near-term outlook for the company, with results beating Street expectations and a revision in prices of coal, largely remains positive.

"The stock has significant potential of an upside as it is currently trading on very low multiples compared to its global as well as domestic peers," said Avinash Ranjan, analyst at Kotak Institutional Equities Research. A report authored by Ranjan, along with Murtuza Arsiwalla, on the company noted its current trading multiples, at 7x price-to-earnings and 5x Ebitda margins, is at 20 per cent discount to the trading multiples at the initial public offering price.

However, concerns still linger around volume growth as analysts remain worried about less-than-estimated volume growth. Going further, they said the company would continue to struggle with volumes due to issues pertaining to environmental clearances.