The Coal India’s stock was the top gainer on Tuesday (up 2.9 per cent) on the NSE. The stock has gained 6 per cent in the last two trading sessions in the backdrop of encouraging performance in production and offtake during August.
According to analysts, growth in both the numbers are sustainable, going forward. The stock is expected to see gradual rise from hereon. According to average analyst estimates, the target price on the stock is worked out at ₹300, which implies about 18 per cent upside potential (one year) from the current levels of ₹253.7.
In August, Coal India reported 16 per cent and 19 per cent increase in production and offtake at 37.6 million tonnes and 43.7 million tonnes, respectively. The numbers are higher than the company’s own target of 36.9 mt and 43.1 mt, respectively.
What’s more, while production in August has risen for the first time in FY18 till date, double-digit growth in offtake was last seen in FY16. Restocking by power plants and lower base of the corresponding quarter last year have led to the rise in both the numbers.
Investors of Coal India have been disappointed with the company (stock touched 52-week low at ₹234 on August 11) on weak performance.
Consensus view is that the future is getting sustainably brighter for Coal India as coal stocks at power plants have been steadily falling over the past one year since States have been delaying procurement due to weak power demand.
Hence, restocking seen in August by power plants looks sustainable followed by new capacity additions (3,000 MW by NTPC), which will lead to steady offtake growth for Coal India.
Brokers’ callsJM Financial estimates 4.5 per cent offtake growth in FY18, compared to 1.6 per cent in FY17. It is bullish on the stock from the long-term perspective as it believes Coal India can deliver higher earnings growth (compounded annual growth rate of 23 per cent in FY18 to FY20) given lower base of FY17 and operating leverage benefit.
“Demand for coal is gradually improving. We believe the company’s fuel supply agreements and e-auction average selling price (ASP) are close to bottoming out. We see the company being well-placed to benefit from a potential rise in ASPs on FSA and e-auction,” adds Saurabh Mehta, Analyst at Daiwa Capital Markets.
Wage hurdleThe only hurdle in the stock’s run-up will be the outcome of the ongoing wage negotiations with workers’ unions. In any case, the stock’s single-digit valuation at seven times FY19 estimated earnings, prices in most negatives such as likely wage hike (spike in employee costs - the biggest cost component), lower volume growth and flat realisations.
Subhadip Mitra, Aanalyst at JM Financial finds the risk-to-reward ratio to be favourable from the long-term perspective given inexpensive valuation, 7 per cent implied dividend yield and potential triggers from volume pick-up in FY19.