Coal India: Growth visibility remains intact

With the divestment news cropping up once again, Coal India touched its 52 week lows of Rs 274.65 on 6th April and now trades at Rs 280.50 levels. However, looking at the good fundamentals and strong dividend yield, any weakness in the price is always a good opportunity for investors to accumulate the stock.

The company is seeing strong ramp-up in volumes. While for the month of March, volumes may have been soft (production and dispatches growth of 3.4 and 3.5 per cent respectively) full year growth was strong. For FY16, the company’s production and dispatches at 536.5 million tonne (MT) and 532.3 MT have registered a growth of 8.6 per cent and 8.8 per, respectively cent over FY15.

Analysts expect the growth momentum to continue in FY17 too. Those at Nomura forecast production and dispatches growth of more than 8 per cent to 579 MT and 575 MT, respectively for FY17. The government is committed to ramping up supplies from Coal India and better railway network, improved rake availability all bodes well for the reduction in bottlenecks for coal evacuation. Rake availability in February (the latest available data) was up by 4.1 per cent to 227 rakes/day as compared to 218 rakes/day same month last year.

What’s more, the volume ramp up bodes well for the company's sales in open market through e-auction which is more profitable compared to sales under FSA (Fuel Supply Agreement) to power companies. Also, with higher production the product mix also improves. Analysts at Motilal Oswal Securities in their recent report (4th April) say that e-auction realisation in February was up 3 per cent month-on-month (or Rs 50/tonne) to Rs 1,773/tonne primarily driven by mix. All this is also positive at a time when coal prices internationally are down. The margins will thus remain maintained as higher volumes drive revenues.

Analysts at Motilal Oswal Securities say that the impact on margin will be limited due to increase in share of more profitable non-power volumes. They estimate a strong 10 per cent compounded growth in volumes over the next five years ensuring that the share of higher margin non-power volumes keeps increasing. This along with operating leverage will help improve adjusted EBITDA per tonne from Rs 403/tonne in FY16 to Rs 503/tonne by FY20. This translates into compounded growth of 14 per cent in adjusted EBITDA FY16-20. Analysts at Nomura also remain positive on the stock with target price of Rs 401. They say that Coal India remains a good long-term story. On FY18 adjusted earnings, the stock trades at 9.0 times PE (EPS: Rs 31.9) and 5.3x Enterprise Value(EV)/EBITDA (9.8 times P/E and 5.6 times EV/EBITDA on reported earnings).