Good Feb volumes not enough, power sector demand key for Coal India stock

Pressure on e-auction premiums, subdued outlook on prices and stake sale overhang remain key concerns

Even as the markets remained choppy on Monday, a decent growth in February coal volumes lifted Street sentiment towards Coal India’s stock, pushing it up by over a per cent. On Tuesday, too, the stock gained over 5 per cent, partly aided by the rebound in leading indices. 

These gains are not surprising, given that the stock had fallen to its all-time intra-day low of Rs 165 a fortnight back. This was because of weak coal prices since mid-January this year. 

Given the subdued outlook on prices and stake sale overhang, the near-term upsides may be limited. This is despite 23 of the 27 analysts polled by Bloomberg having a “buy” rating on the stock with an average target price of Rs 254.

Volumes improving

The company had consistently reported a decline in volumes during the first half of FY20. This was also a key reason why its stock price had been under pressure during the June-November 2019 period. Though some improvement has been reported from December, the quarter ended December (Q3) still witnessed sales volumes decline 8 per cent year-on-year (YoY). So, the latest numbers are some respite.

In fact, February saw better recovery with production volumes increasing 14.2 per cent YoY to 66.3 million tonnes 

(MT) and sales volumes growing 6.8 per cent YoY. 

 

 

A big positive is that the company’s larger subsidiaries, which had faced some problems earlier, are now driving sales and production. South Eastern Coal Fields (SECL) and Mahanadi Coalfields (MCL) saw 11.9 per cent to 19.2 per cent YoY growth in production. MCL also reported an 11 per cent growth in sales. 

Notably, Bharat Coking Coal (BCCL), which produces the highest grade of coal, also recorded an uptick of 8 per cent YoY in sales, staging a turnaround after 18 months. 

If BCCL sustains the trend, it can support Coal India’s blended realisations. Overall, the production run-rate in February, at 66.3 MT, showed a marked improvement compared to 43 MT achieved in 9MFY20.

While the improved performance is positive, the Street will remain watchful on sustenance of the trend. Coal India is also looking to aggressively ramp up production and dispatches to post decent full-year numbers.

However, analysts say that a recovery in demand from the power sector will be key to overall improvement. 

Notably, coal inventory across plants in India increased to 21 days amid weak power demand.

An improvement in demand holds key to the company’s prospects as the power sector accounts for a large chunk of Coal India’s sales.

 

 

Concerns over pricing

Moreover, the market would also be looking at how coronavirus impacts international coal prices. Global prices are already under pressure. The same also remains crucial for Coal India’s more-profitable e-auction prices, which are market determined. During the financial year, e-auction premiums, too, have remained weak along with production numbers. 

E-auction premiums had declined to 51 per cent in January 2020 from 67 per cent in December 2019. The decline in prices since January is one reason why the Coal India stock has been under pressure even as volumes improved.

On the whole, besides the caution on fundamentals, the overhang of stake sale by the government, too, is weighing on Street sentiment. It is not surprising that despite analysts giving buy ratings and valuations remaining cheap, the stock had fallen to its all-time low a few days back.

After the Q3 performance, analysts at ICICI Direct, while valuing the stock at 5x FY21E adjusted EV/Ebitda, had arrived at a target price of Rs 200. Those at Kotak Institutional Equities have recently given a target price of Rs 280. 

These ratings are largely considering the cheap stock valuations and the high dividend yield of 12 per cent.