Growth in February volumes brings respite to Coal India investors

Analysts keeping an eye on e-auction premiums but believe valuations are at attractive levels

Investors in Coal India (CIL) will be relieved, if not content, by the 3 per cent year-on-year (YoY) growth in shipments registered by the firm during February, given that concerns over volume growth had led to the stock’s underperformance.

India’s largest coal miner had seen shipments decline during the past few months, led by lower dispatches from major subsidiaries.

In February, shipments by its largest subsidiaries such as Mahanadi Coalfields and South Eastern Coalfields rose 2 per cent and 4 per cent, respectively. CIL’s YoY production growth of 6.5 per cent, to 58.1 million tonnes (mt), was also led by these arms.

This instils confidence as some analysts believe volume recovery may be on the cards and bottlenecks around dispatches may be getting resolved. Analysts at Edelweiss Securities say: “We perceive the rise in shipments at major subsidiaries positively as this will aid in Coal India’s volumes, going ahead.”

While rising volumes could drive more profitable e-auction sales, analysts remain watchful on e-auction premiums (price difference between e-auction and notified sales, with the latter being at pre-determined prices).

E-auction sales were down by a third during the first nine months of FY19. Overall e-auction revenues, nevertheless, could still grow 0.5 per cent YoY, led by a 50 per cent YoY rise in e-auction realisations.

Concerns over e-auction prices, however, remain elevated given that the decline in international coal prices and lower coal imports by China may both lead to higher supplies coming to India.

Further, analysts point out that with production outpacing shipments for four consecutive months, high coal inventory build-up could also put pressure on e-auction premiums.

While analysts remain watchful on the same, most believe that these concerns have been priced in. After the steep correction in the stock — part of which was due to the government’s stake sale overhang — CIL is trading at a significant discount to its long-term average, and dividend yield remains attractive.

Analysts at Motilal Oswal Securities had said that if they were to historically model the lowest e-auction price of FY17, the stock valuation would still be at a significant discount to its historical averages. They see an upside of around 16 per cent from current levels.

Even analysts at Kotak Institutional Equities, after the announcement of production numbers, said that the continuous divestment by the government has led to valuations being incrementally attractive. Coupled with a 10.7 per cent dividend yield on FY20 earnings, the analysts maintain a positive view on the stock.