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Coal India has seen its stock price fall from its 52-week high of Rs 447.25 a share in the first week of August to Rs 358. The government’s plan to divest part of its stake has been the key reason for the correction. With business fundamentals intact, the correction offers a good opportunity for investors to accumulate the stock. The company is benefitting from increasing production with bottlenecks being removed. Realisations should inch up.
With the coal ministry setting a one-billion-tonne annual production target for Coal India by FY20, the focus has increased on capex outlays, improving railway evacuation systems, etc. Production growth has touched double digits. While the company produced 121.3 million tonnes (mt) during the June quarter, off-take volumes at 129.4 mt grew 8.2 per cent. The more-profitable e-auction volumes are rising. At 16 mt, e-auction volumes were 16 per cent higher than expectations of 13 to 14 mt for the quarter.
Blended realisation per tonne was Rs 1,465 against expectations of Rs 1,550. Fuel supply pact and e-auction realisation had seen some decline. But it was expected, given the soft global prices.
The soft patch in realisations may continue, but a gradual recovery is expected. Analysts at Motilal Oswal Securities say e-auction prices are 20-25 per cent cheaper in value terms compared to imports, and they expect e-auction prices to recover gradually during the year.
Analysts at Nomura say beyond FY16, the sustained impetus to augment production and rail infrastructure should enable a FY16-20 off-take compound annual growth of 8.5 per cent. This and a sizeable rise in notified coal prices in the first quarter of FY17, with higher third-party contracting and benign diesel prices will offset pressure on margins.
Though analysts have tweaked their e-auction and, in turn, realisation estimates after the June quarter results, they have arrived at a target price that still indicates good upside. Nomura analysts have raised the total production and off-take forecasts by 1.7 per cent. Their revised target price comes to Rs 407 (Rs 417 earlier). Motilal Oswal’s analysts set target of Rs 439, and Angel Broking’s Rs 400. These indicate a potential upside of 12-23 from current levels. If one adds the 5-6% dividend yield, investors could end up with higher returns.
