Dueto several negative factors, Coal India was under pressure for the last oneyear and it underperformed the Sensex by a whopping 38% (see Relative Performance Chart). The wagehikes and the resultant pressure on margins was one of these negative factors. Gradeslippage (ie disputes by customers about the grade of coal they received) was thesecond negative factor. Coal India has invested heavily in quality controlsystems (like increased mechanisation) to reduce this dispute.
Grade slippage argumentswere also because of the huge price differentials between grades and Coal Indiamanaged it with recent price rationalisation. While Coal India cut the pricesof its high and low grade coals, it increased the prices of interim grade coalssubstantially. For example, while the prices of G2, G16 and G17 were gone downby 5%, prices of G6 and G7 were up by 22% and 20% respectively. Thisprice rationalisation has also resulted in coal prices going up on an average andanalysts 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 introductionof evacuation charge of Rs 50 per tonne would more than offset the wageincrease and therefore, will result in margin expansion. Lowervolume growth and decline in e-auction price were other concerns. Reduction inintake by power plants (due to issues pertaining to them) was the main reasonfor this. With government taking action on these issues, the coal intake bypower producers has started picking up once again. Stock levels are still low atpower plants (9 days now against the historic average of 12 days), sorestocking expected to continue in coming months and this should result in increasedvolume growth for Coal India. Increased demand from power sector companies hasreduced supply to other sectors and due to this, e-auction prices are also expectedto remain firm in coming quarters. With the growth coming back (ie as per consensusestimate, its revenue and net profit are expected to show CAGR of 11% and 25% respectivelybetween 2016-17 and 2018-19), analysts say that this counter is ripe for are-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.
Moreimportantly, the current dividend yield of 6.83% is more than most bank FDs.