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Coal India: Premium valuations may sustain if notified coal prices increase

ike many other matters, the government is also optimistic about increasing annual coal output to one billion tonnes by 2020. This suggests Coal India’s output should start to improve, if it has to reach the targeted levels in five years. The company is expected to exit FY15 with an output of 493 million tonnes (mt) and is expected to produce 528 mt in FY16. Though most analysts believe the government’s target is optimistic, it is clear the output is expected to pick up once evacuation infrastructure (railway rakes) improves. The Street expects the government to give an outline of the infrastructure road map on coal movement. According to Nomura, matters related to land acquisition/possession, rehabilitation & resettlement, and rail links need substantial and coordinated heavy lifting by central/state authorities and the risk of delays cannot be underestimated.
This is not the only overhang on the stock. Analysts believe the government might divest another 4.65 per cent in Coal India to meet the minimum free float norms, which would put pressure on the stock price. Despite this, sell-side analysts remain positive on the stock for a variety of reasons. For starters, the government will have to find ways to unlock India's vast mineral resources to cut imports. Coal is one mineral the country needs. Barclays expects strong volume growth-driven by the government’s push towards increasing production. The brokerage believes volume growth would be driven by resolution of critical evacuation infrastructure and faster adoption of the mine developer-cum-operator process.

Coal India is trading at 6.6 times EV/Ebitda and 10.6 times its price/earnings multiple, both are at the higher band of historical average. Analysts believe there are several factors that might support the Street’s optimistic view on the stock. A big trigger could be an increase in the prices of notified coal. Currently, 80 per cent of Coal India's coal is sold at notified prices and 16-18 per cent is sold through the e-auction route. Currently, Coal India's prices are 35-45 per cent below prices of imported coal. Nomura believes Coal India can sustain valuations if there is a reasonable rise in notified coal prices over the next 12-18 months, ahead of wage revisions due in FY1 and if operating margin is supported by recent moderation in diesel prices.

source: http://www.business-standard.com