People walk down from a pedestrian bridge as a freight wagon laden with coal stands at the Tori station on the Tori-Shivpur rail line, operated by Indian Railways and funded by Coal India Ltd., in Chandwa, Jharkhand, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Coal India Clocks Best August Gains Since 2010 Listing

State-run Coal India Ltd. clocked best August gains since its listing back in Nov. 2010, aided by higher demand and lower wage costs.

Shares of the world’s largest miner of coal rose over 9 percent in August, tracking the Nifty Metal Index, according to Bloomberg data. Prior to that, the stock rose only once during the month since listing—in 2016.

It outperformed the benchmark gauge this year, rising over 8 percent year-to-date compared with a 7.2 percent decline in the Nifty Metal Index.

Coal India supplies nearly 70 percent of the fuel to power units that cater to three-quarters of electricity demand in India, according to the Central Electricity Authority. While the miner missed the output target in the quarter ended June, demand for the fuel remains strong. That helped the company improve offtake.

Here’s what aided investor sentiment for Coal India:

Also read: Q1 Results: Coal India’s Profit Misses Estimates

Higher Offtake

Coal India reported a double-digit growth in volume for the June quarter as dispatches rose.

The volume growth has been driving Coal India’s operating leverage gain, according to brokerage Motilal Oswal.

Coal India Clocks Best August Gains Since 2010 Listing

Price Hikes

Coal India has increased prices thrice so far this year, mainly for coal supplied through the fuel supply agreements and its transportation and loading charges.

The benefits of the price hikes are expected to reflect in the ongoing financial year, JPMorgan said.

E-Auction Realisation

Realisations for high-yield e-auction coal rose the most in at least eight quarters on higher spot market prices from the non-power sector, in line with higher international coal prices. The realisations were higher despite the lower share of e-auction volumes.

Fuel Supply Agreement Realisations Recovering

Realisation of coal supplied through the fuel supply agreements rose 9.3 percent year-on-year to Rs 1,313 a tonne in the June quarter. It, however, declined 6.5 percent sequentially.

FSA realisation, which forms the bulk of the total realisation, are set to recover as the full impact of grade slippage is largely over, according to an earnings report by Emkay Research.

Employee Costs Likely To Normalise

Coal India’s employee benefit cost rose to Rs 42,630 crore in the financial year ended March 2018 as the company provided for an increase in gratuity limit from Rs 10 lakh to Rs 20 lakh and wages for executives and non-executives.

The employee cost, however, is expected to normalise to Rs 36,000-37,000 crore in the ongoing financial year, which will suppost its earnings before interest, tax, epreciation and amortisation and profitability, according to Reliance Securities.

Stock Cheaper Historically

The stock trades at 6 times its previous 12-months enterprise value-to-Ebitda, which is 18-21 percent lower than its two-year and five-year averages, according to Bloomberg.

Analysts remain bullish with more than 80 percent of the 32 analysts tracked by Bloomberg having a ‘Buy’ rating on the stock. The consensus return potential is 18-19 percent.

Yet, there are downside risks according to JPMorgan.

  • The government’s plan to sell a stake in the miner to meet its divestment target for the financial year.
  • Uncertainty over Coal India’s ability to hike prices for the next one to two years as it has already hiked prices thrice this year.

Also read: India's Top Power Producer Seeks First Coal Imports in Four Years