The Coal India stock has corrected 16 per cent from its February high on concerns of stake sale by the government. While the sale overhang may persist, it is also providing an opportunity to investors. The correction has made the stock valuation inexpensive while the earnings outlook remains intact, which is why many analysts find the company's stock risk attractive.
On the earnings front, healthy growth in volumes and price hikes are lending confidence. Although sales volumes of 153 million tonnes (MT) for June quarter may be short of the company's own target, it is still 11.7 per cent higher compared to the same quarter last year. The volume momentum is likely to sustain, given the additional evacuation capability of 26 MT per annum at Jharsuguda and Tori, say analysts. Even as e-auction (free-pricing sales) contributes to only about a fifth of total volumes, improved realisations and volumes in the segment, led by strong demand will add to the profitability.
Better realisations from coal supplied under fuel supply agreement (FSA), where prices are pre-determined, after January hikes, will also push up the profitability. This should help the company take care of higher employee costs after wage increments; provisioning has been already done for most of it. Analysts estimate that FSA realisations to increase 10 per cent year-on-year to Rs 1,322 per tonnes during the June quarter. Their channel checks also indicate that the e-auction premium (over FSA price) will be sustained at 70 per cent, thanks to firm international coal prices and domestic demand.
All this has led to high expectations from the company. Motilal Oswal Securities, for instance, estimates Coal India's net profit will be double in the June quarter compared to the year before, while analysts at Nomura expect its adjusted/reported earnings per share to grow at a compounded rate of 24 per cent and 17 per cent, respectively, over FY18-20. While strong growth bodes well for the company, it is also seen as a defensive play on domestic growth, with less correlation to international volatility. A good dividend yield comes as a boost. Edelweiss Securities sees a 23 per cent upside potential for the stock and an additional dividend yield of 6-7 per cent over the next two years, while Nomura’s new target price indicates 20 per cent upside.