Goldman Sachs Downgrades Coal India To ‘Sell’

Coal India Ltd., the worst performer on the S&P BSE Metal Index so far this year, could see further downside on higher expenses, lower prices and offtake, said Goldman Sachs.

The international brokerage house has downgraded the world’s largest coal company to a ‘Sell’ and also lowered its target price to Rs 225 from Rs 290 earlier – potential downside of around 12 percent from Wednesday’s closing price.

Rising Costs

Coal miner’s employee expenses have risen in financial year 2017 by 11 percent due to revision in salaries. Apart from wages, contractual expenses have also risen by 11 percent. These expenses nearly account for 72 percent of the total expenses of the company.

The company revises salaries of its over 300,000 employees every five years, with the last increase taking effect from July 2011. Coal India is yet to finalise these wage negotiations and any further rise in these expenses will hurt the company's margins, Goldman said in a research note.

Falling Prices And Volume

The brokerage house expects coal prices to remain weak due to government’s initiative to keep power prices low and its shifting focus on renewable energy.

The Indian government has been focused on keeping prices low as coal is a primary commodity. Coal India has only seen two price hikes over the last four years. That too, it has failed to materialise into profit because of the slipping grades of coal mines. 41 percent of the mines which contribute to 35 percent of the volumes were downgraded recently. Only 8 percent were upgraded.

The government-regulated long-term contracts and e-auction prices are unlikely to see any price hike on the back of weak demand from power companies adding more pressure on the company.

Year-to-date Coal India has been the worst performer on the S&P BSE Metal Index. The stock declined over 15 percent against a 11 percent rise in the sectoral gauge.

Also Read: Coal India Will Shut 37 Mines In FY18