Coal India shares outperformed on Wednesday, rising nearly 1 per cent to Rs 335 against over 1 per cent drop in the broader Nifty. Coal India has seen consistent buying over the last two weeks, despite weakness in the broader markets. A number of brokerages continue to be optimistic about Coal India despite the state-run miner missing earnings estimate for the second straight quarter.
Why Brokerages Are Bullish on Coal India?
1) Coal India’s September quarter earnings were impacted by lower realizations from e-auction. During the quarter, e-auction prices declined sharply to Rs 1,788/tonne, down nearly 28 per cent year-on-year, following a drop in demand in the power and non-power sectors. But HDFC Securities expects e-auction premiums to revert to normal.
2) Analysts also expect e-auction volumes to improve in the second half of the year. Nomura increased its forecast of e-auction volumes to 59 MT (11.1 per cent of offtake) for FY16, from earlier estimate of 50 MT.
3) Coal India has headroom for increasing prices, analysts say, and this could offset the imminent earnings dent due to upcoming wage revisions. According to Moody’s, domestic coal is currently around 45 per cent cheaper than the landed cost of imported coal.
4) High-single digit growth in coal offtake is sustainable in the medium term as rail routes are built out and the government’s focus on boosting output, the brokerage added. Year-to-date, the miner’s offtake has grown by 10 per cent.
5) Analysts say that the government’s recent revival package for discoms or state electricity boards bodes well for coal demand and eases payment risks in the value chain.
6) HDFC Securities expects Coal India to deliver strong volume growth which will help to offset high fixed employee costs.
7) Nomura says Coal India is attractively valued, has a strong balance sheet (cash pile of over Rs 53,000 crore) and offers attractive dividend yield.
8) Nomura expects Coal India to maintain a healthy free cash flow despite higher capital expenditure. The brokerage expects a reasonable hike in notified coal prices next year.
9) Coal India shares are currently trading 10.5 times is FY16/FY17 adjusted earnings per share forecast, which is 10-15 per cent below its historical 3-year averages, says Nomura.
10) However, analysts say that the government’s disinvestment of up to 10 per cent stake in the coal miner remains a near-term overhang on its stock price performance. Both Nomura and HDFC Securities have a ‘buy’ rating on the stock, with a target price of Rs 400, a potential upside of 20 per cent from current levels.