Coal India regaining investor confidence; delay in stake sale plan may help

As outlook on realisations improves, delay in govt's stake sale plan may also help

Coal India (CIL) shares have risen about 11 per cent in a month, outperforming the 2.5 per cent rise by the S&P BSE Sensex. 

Given the improving outlook on the business front and reasonable stock valuations, analysts believe there are more gains ahead.

Better realisations for coal supplied under fuel supply agreements (FSAs; largely to power sector) and improving volumes as well as prices of e-auction coal (which is more profitable), both point to strong outlook for the company. 

Analysts say the fourth tranche of linkage auction, which was conducted recently, has so far-fetched a premium up to 39 per cent, compared to 9.7 per cent earlier. 

Led by the hike in the price of non-coking coal earlier this year, stabilisation of grades, and the revised loading and surface transport charges — FSA realisations are improving; these were up 9 per cent in Q1. 

E-auction prices, too, were up 51 per cent year-on-year and 14 per cent sequentially in the June quarter, and will drive profitability going ahead. 

Thus, analysts see a surge in CIL’s profits for the current year. Rupesh Sankhe at Reliance Securities is confident of profits more than doubling in FY19. 

At the same time, Edelweiss expects the company to clock a compound annual growth rate of 36 per cent in earnings through FY20 — benefitting from a ramp-up in production, better evacuation infrastructure, demand uptick in both power and non-power sectors, and robust international coal prices supporting e-auction premium.

Moreover, wage hikes and slippages in coal grades, which weighed on profitability last year, are behind too. Better realisations will now mitigate cost pressures, if any. Recent news of the stake sale planned by the Centre being deferred should also allay concerns in the near term. From a long-term perspective too, there are triggers. The post-Q1 results meet of CIL affirms analysts’ view that it is on schedule to touch 1 billion tonnes in production by FY23. 

This will be aided by identification of mines with capacities that can support production and the likely improvement of 100–150 million tonnes per annum in evacuation capability through the doubling of railway lines. 

Other significant factors are likely to be the building of new corridors, set to be completed by FY20, and the value enhancement at 56 loss-making mines. Prabhudas Lilladher analysts said that with concerns related to grade slippage and inability to rationalise costs now behind, investors will not be as worried given the better outlook in earnings, coupled with attractive valuations.