 "Coal India stake sale overhang leads to underperformance")
Coal India gains the spotlight with the government’s decision to sell 10% stake in the company. However, the street has been anticipating the same and the stock has underperformed the broader indices substantially. Coal India has lost more than 25% on the bourses since the start of August compared to the Sensex fall of slightly less than 9% during the same period. It trades 1.95% down at Rs 330 levels today. However, the stock has still underperformed despite improving performance by coal India. Investors can use the weakness to accumulate the stock, looking at a substantial upside of 14-39%, as is indicated by analysts’ target price for the stock.
Coal production increased 9.2% during April-October 2015, whereas off take has improved 9.9% during the period. This is impressive looking at the company’s past performance and also the fact that the period includes monsoon months when mining gets impacted. These increasing volumes have led the company to report better than expected performance during the September 2015 quarter. With costs under control, the company reported 16% y-o-y growth in earnings after several quarters of decline. This is despite declining realisations due to a fall in coal prices. The most profitable e-auction realisations have been on a continuous decline (Rs 2,450 a tonne during FY15 and Rs 2,184 a tonne during the previous quarter) were at Rs 1,787 a tonne (the lowest ever) during the September quarter.
Moving forward too the realisations are to remain soft looking at weak international coal prices. However, the earnings are to be driven by volume growth as has been the case in the September quarter that saw 10.2% increase in volumes offsetting a 2% decline in blended realisations. On the e-auction front too, while the realisations have been lower on account of a fall in global prices, it is offering higher quantities to offset the impact. E-auction volumes rose 39% y-o-y at 14.7 MT during the September 2015 quarter. Kamlesh Bagmar at Prabhudas Lilladher says that the second half FY16 would partially benefit from additional 14 MT allowed for sale to the power sector and non-power sector through the e-auction route.
The company is working on improving coal evacuation from its facilities. The construction of railway lines connected to Mahanadi Coalfield Limited (MCL) and South Eastern Coalfields Limited (SECL) is expected to be on schedule. A line connecting Jharsuguda-Barpali-Saradega for the movement from MCL mines should come on stream by June 2016 and one connecting to SECL mines should be ready by September 2017 as per analysts at HSBC. They expect production at Coal India to increase from 494 MT in FY15 to 622 MT in FY18 and sales to rise from 489 MT in FY15 to 622 MT in FY18.
Though looking at softer realisations, analysts have tweaked their earnings estimates; however, their target prices still indicate a substantial upside. While HSBC has a target price of 463, Prabhudas Lilladher’s target price stands at 405 and Angel broking at Rs 380. This means anlysts expect an upside of 14-39% being for a stock priced at Rs 333 levels. The weakness in stock prices due to the stake sale overhang can be used by investors to accumulate the stock for medium-long term gains.