Coal India's long-term prospects remain healthy; analysts positive on stock

Investors may use any OFS-led decline in stock price to accumulate its shares

Coal India (CIL) made two important announcements. The first was that it would raise prices of high-grade G2-G10 non-coking coal by around 8 per cent, which would help partially offset a wage hike. The second announcement was that the government intends to sell a 3 per cent stake using the OFS mechanism this week. The estimated value of the OFS is about Rs 4,000 crore, and the floor price would be Rs 225 per share, which represents a discount of around 7 per cent from the closing price of Rs 241.2 on Wednesday.  

The stake dilution will lead to a temporary depression of the share price. The fuel major has already witnessed downside pressure due to provisioning for the wage hike, which will add around Rs 6,000 crore to expenses in FY24. The price hike will offset about Rs 2,700 crore of that. According to analyst estimates, it affects roughly 30 per cent of volume. 

Meanwhile, recent e-auction prices have declined and the near-term outlook on premia in e-auctions over FSA (fuel supply agreement) prices remains soft. The company usually manages to sell around 10 per cent of its volume in e-auctions after fulfilling FSA; it relies on the e-auction premia to give it high realisations. Given election considerations and generic apprehensions about inflation, it’s unlikely that the company will consider further significant hikes in FY24, at least. 

Management guidance suggests that production volume may increase from 695 million tonnes (mt) in FY23 to around 780 mt in FY24 (despatches of 773 mt). In that case, the e-auction volume would be strong and could hit 100 mt (it was 62 mt in FY23), compensating for a possible drop in prices. In April 2023, CIL achieved 7.4 per cent of its annual target. 

Around 70-75 per cent of power generation is via thermal and 80-85 per cent of domestically produced coal is supplied to the power sector. CIL accounts for around 80 per cent of the power sector’s coal supplies. While CIL is trying to diversify using a ‘coal-to-chemicals’ business strategy to ensure higher value-add, this remains the core business. Capex intensity is expected to remain high at Rs 15,000-17,000 crore per annum. 

CIL achieved some production ramp-up in FY23 and the FY24 target could be achievable. This would improve operating leverage. Better e-auction volumes would sustain margins, even if premia over FSA are less. 

The stake dilution would probably depress the share price temporarily and investors would also factor in the higher wage bill, which is not fully covered even with the FSA hike. Chances are the stock would continue to give decent dividend yields in the high single-digit zone. The medium-term to long-term prospects appear to be positive and a price decline may be a buying opportunity. Analysts were positive on the stock after news of the FSA hike.