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Coal India has run up 58 per cent over the past three months, in the hope that the miner will step up production further. Like most other state-owned entities, Coal India, too, has rallied on the hopes that it will be a beneficiary of policy changes that will improve its functioning and output.
Over the last five years, Coal India’s CAGR volume growth has been an abysmal three per cent. Volume growth picked up in FY14 but not sufficiently to support strong growth in profits. In FY14 Coal India produced of 462 million tonnes (mt) of coal against its (targeted 482 mt. Offtake during the year was 472 mt, against a target of 492 mt.
Lack of incremental volumes have also been a drag on the company’s revenue growth in the March quarter just as flat realisations have impacted operating profit growth. The miner’s operating profit 16.5 per cent year-on-year to Rs 5,107 crore. Coal India’s net profit declined for a fourth straight quarter by 18 per cent year-on-year to Rs 4,434 crore during the fourth quarter.
Kotak Institutional Equities says: “A total of 241 coal mining projects are awaiting clearances — 48 environmental clearance proposals with a capacity of about 109 mt and 193 forestry proposals at central or state machinery.” The Street expects the government to act on these projects which are stuck at various levels. It is for this reason that the stock has continued to rise even after such a sharp uptick in three months. Coal India’s shares are up 4.5 per cent since it reported its results last week.
Analysts expect the new government to focus on improving production, which will improve its profitability too. The Street expects the government to focus on setting up routes that can carry 100-300 mt per annum. The miner has also increased its target offtake to 615 mt in FY17 from 556 mt earlier, due to 60 mt expected contribution from contract mining. Antique Stock Broking estimates FY17 offtake to be 567 mt. In a note, Rahul Modii of Antique says: “Due to the recent reforms like financial restructuring package and robust capacity addition in the power sector, we expect the coal offtake to increase further.”
There is evidence of things moving in this direction already. Of the 20 projects that were awaiting environmental clearances, 16 projects have been cleared. These projects have an annual capacity of 160 mt.
The government has also allowed 50 per cent expansion from 25 per cent without any public hearing for mines with capacity of eight mt. Even though the stock enjoys premium valuation due to its monopolistic position, it continues to see buying on hopes of uptick in volumes and offtake.
