to several negative factors, Coal India was under pressure for the last one
year and it underperformed the Sensex by a whopping 38% (see Relative Performance Chart). The wage
hikes and the resultant pressure on margins was one of these negative factors.
slippage (ie disputes by customers about the grade of coal they received) was the
second negative factor. Coal India has invested heavily in quality control
systems (like increased mechanisation) to reduce this dispute. Grade slippage arguments
were also because of the huge price differentials between grades and Coal India
managed it with recent price rationalisation. While Coal India cut the prices
of its high and low grade coals, it increased the prices of interim grade coals
substantially. For example, while the prices of G2, G16 and G17 were gone down
by 5%, prices of G6 and G7 were up by 22% and 20% respectively.
price rationalisation has also resulted in coal prices going up on an average and
analysts expect that this will result in a 7% increase in its blended realisation
(ie revenue increase of Rs 6,400 cr per annum). This price rise along with the introduction
of evacuation charge of Rs 50 per tonne would more than offset the wage
increase and therefore, will result in margin expansion.
volume growth and decline in e-auction price were other concerns. Reduction in
intake by power plants (due to issues pertaining to them) was the main reason
for this. With government taking action on these issues, the coal intake by
power producers has started picking up once again. Stock levels are still low at
power plants (9 days now against the historic average of 12 days), so
restocking expected to continue in coming months and this should result in increased
volume growth for Coal India. Increased demand from power sector companies has
reduced supply to other sectors and due to this, e-auction prices are also expected
to remain firm in coming quarters.
With the growth coming back (ie as per consensus
estimate, its revenue and net profit are expected to show CAGR of 11% and 25% respectively
between 2016-17 and 2018-19), analysts say that this counter is ripe for a
re-rating. Coal India is also in a stable business that generates free cash flow;
it must be able to maintain its high dividends in coming years as well. More
importantly, the current dividend yield of 6.83% is more than most bank FDs.