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CILCoal India Ltd
Last week, shares of Coal India Ltd (CIL) increased by 4%. During the week, the coal producer announced better production and offtake (sales volume) performance for December. Investors were hoping for some recovery, considering that the numbers for the first eight months of the fiscal year 2020 were discouraging, thanks to an extended monsoon and labour issues.
For December, production and sales volume increased by 7% and 2%, respectively, on a year-on-year basis. This compares favourably with the performance of the nine months ended December, when production and sales volume declined by 5.8% and 6%, respectively, over the year-ago period. Of course, CIL would have to do much better if overall FY20 numbers have to look good.
Here, recovery in demand from the power sector will be key, said analysts from Kotak Institutional Equities. It must be said here that even though production growth in December looks decent, sales volume growth of just 2% is hardly inspiring. Analysts from Edelweiss Securities Ltd expected Coal India’s sales volume to fall 3% year-on-year in FY20. “We perceive good possibility of 6% year-on-year volume uptick in FY21,” added Edelweiss in a report on 2 January.
From a near-term perspective, investors will keep a close watch on how Coal India’s price realizations have moved for the December quarter, when it announces its financial results. For the September quarter, the firm had posted 10% year-on-year increase in realizations from coal sold through the fuel supply agreement (FSA) route, which had helped overall profitability. Some expect the trend of better FSA realizations to continue for the December quarter. Meanwhile, despite the recent appreciation in the Coal India stock, it has underperformed the Nifty 100 index in the past year. The only saving grace about this trend is that valuations look cheap. The stock currently trades at seven times estimated earnings for financial year 2021, based on Bloomberg data.
Investors worry about potential government stake sales, which would lead to an increase in free float. This remains a key overhang for the stock, said analysts. “We note that attractive valuations and moderated earnings expectation aside, Coal India’s stock performance (since the Union budget) has been impacted by aggressive disinvestment targets that may likely increase with lower corporate tax revenues,” wrote Kotak analysts in a report on 2 January.
With divestment of Bharat Petroleum Corp. Ltd, Container Corp. of India Ltd and Air India Ltd looking impossible to complete in FY20, reports suggest the government is considering an offer for sale in various firms, including CIL. This possibility is weighing on the stock, which has fallen about 11% in the past year.
