 "CIL: Underperformance an opportunity")
The government's decision to sell 10 per cent stake in Coal India (CIL) doesn't seem to have worried the Street, as the stock was marginally down on Thursday. For one, the Street has been anticipating the move, also partly reflecting in the stock's recent underperformance.
The stock is down 25 per cent since August, compared to the Sensex's nine per cent decline. Part of the under-performance is also due to soft coal realisations. While nod to stake sale can face opposition of employee unions and one cannot be sure of the timing of the stake sale, leading to sustained pressure in the near term, the performance of CIL has been improving regularly, evident in second quarter results. Consequently, the weakness in the counter is a good buying opportunity with medium-term perspective.
The company's coal production has increased 9.2 per cent during April-October to about 300 million tonnes (mt), whereas sales have improved 9.9 per cent. This is impressive, looking at the past record. Increasing volumes have helped it report better than expected performance in the September quarter. Net profit grew 16 per cent over a year.
Higher volumes continue to offset the fall in realisations. And, the quarter saw a 10.2 per cent rise in volumes, offsetting the two per cent decline in blended realisations. Realisations in e-auction, most profitable for CIL, declined to its lowest-ever level of Rs 1,787 a tone, from Rs 2,184 a tonne during the previous quarter and Rs 2,450 a tonne during FY15. Kamlesh Bagmar at Prabhudas Lilladher says the second half of FY16 would partially benefit from an additional 14 mt allowed for sale through e-auctions. Hence, improving volumes will continue benefiting, even as realisations remain soft.
Although soft realisations have led analysts to tweak their earnings estimates, their target prices indicate substantial upside. The target price of HSBC (Rs 463), Prabhudas Lilladher (Rs 405) and Angel Broking (Rs 380) indicates potential upside of 14-39 per cent from the current levels of Rs 334. At these levels, the stock is slightly below the offer price of government's previous stake sale in January, indicating a possible bottom.
The stock is down 25 per cent since August, compared to the Sensex's nine per cent decline. Part of the under-performance is also due to soft coal realisations. While nod to stake sale can face opposition of employee unions and one cannot be sure of the timing of the stake sale, leading to sustained pressure in the near term, the performance of CIL has been improving regularly, evident in second quarter results. Consequently, the weakness in the counter is a good buying opportunity with medium-term perspective.
The company's coal production has increased 9.2 per cent during April-October to about 300 million tonnes (mt), whereas sales have improved 9.9 per cent. This is impressive, looking at the past record. Increasing volumes have helped it report better than expected performance in the September quarter. Net profit grew 16 per cent over a year.
Higher volumes continue to offset the fall in realisations. And, the quarter saw a 10.2 per cent rise in volumes, offsetting the two per cent decline in blended realisations. Realisations in e-auction, most profitable for CIL, declined to its lowest-ever level of Rs 1,787 a tone, from Rs 2,184 a tonne during the previous quarter and Rs 2,450 a tonne during FY15. Kamlesh Bagmar at Prabhudas Lilladher says the second half of FY16 would partially benefit from an additional 14 mt allowed for sale through e-auctions. Hence, improving volumes will continue benefiting, even as realisations remain soft.
Although soft realisations have led analysts to tweak their earnings estimates, their target prices indicate substantial upside. The target price of HSBC (Rs 463), Prabhudas Lilladher (Rs 405) and Angel Broking (Rs 380) indicates potential upside of 14-39 per cent from the current levels of Rs 334. At these levels, the stock is slightly below the offer price of government's previous stake sale in January, indicating a possible bottom.