Coal India is in a sweet spot; should you buy?

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Thanks to the power outages in China, Coal India is buzzing on Dalal Street. Shares of state-run firms have advanced 11.5% over the past 5 trading sessions, at a time when benchmark indices are reeling under pressure as Sensex, Nifty 50 lost over 1% during the same period. The rally in Coal India is backed by an uptick in international coal prices and coal stockpiles in power plants at nearly three years low.

Coal price

Internationally, coal future prices have touched a new high at $210/t, up 260% YoY (Year on Year). “This is a result of multiple factors tight supply in China, as the country aims to achieve emissions standards; a lack of supply additions, given socially conscious outlook; imports constraints on specific countries like Australia; and a surge in natural gas prices amid prospects of a shortage in inventories, precisely in Europe,” stated a report released by Antique Stock Broking. Coal India sees the current scenario to prevail over the next 4-6 months.

Stockpiles

Adding to the international woes and higher demand for electricity, heavy rains in the largest mining regions are worsening the coal supply crisis. Flooded mines and water-logged roads have slowed down operations. The stockpiles of the coal are reduced to 9.3mnt, the lowest since October 2018, data from the CEA shows.

“Coal stockpiles at power plants have declined 73% over the past year, leaving nearly 121GW of generation capacity with stockpiles of a week or less as of 21 September 2021,” added the report.

Dispatches

Coal India has set the dispatch target of 740mnt in FY22E. With monsoons and Covid-19, however, the company internally looks to achieve an offtake of 710mnt-730mnt. With 99mnt inventory in hand, the production target could range 610mnt-650mnt in FY22E. “To achieve the higher end of band, Coal India needs production rate over 1.8mnt/day. In September-21, however, the initial trends show production rate of 1.71mnt/day, up 15% YoY,” the report noted.

E-auctions

Coal India assumes 20% of the total volumes to be met through e-auctions. Without e-auction, there could be 250-300 basis points EBITDA (Earnings Before Interest Tax Depreciation & Amortisation) margin erosion. The company, however, finds the e-auction premium in the range of 40 to 50% in certain segments and it is likely to continue that way. “Adding to e-auctions, with declining receivables at Rs 13,000 crore now, as against Rs 17,000 crore in past, cash on books has increased to Rs 25,000-30,000 crore, giving enough liquidity cushion,” the report said.

Citing this Antique Stock Broking has a buy rating on the stock with a price target of Rs 240 per share as it expects Coal India to post revenue CAGR (Compounded Annual Growth Rate) of 8% and net profit CAGR of 11% between FY21-FY24.

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