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Business News/ Market / Mark-to-market/  Coal India: Waiting for price hikes
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Coal India: Waiting for price hikes

Potential price hikes and news flow surrounding that will act as a trigger for the stock from a near-term perspective

Coal India has had a good year on the production and offtake (sales volume) front. Photo: Indranil Bhoumik/MintPremium
Coal India has had a good year on the production and offtake (sales volume) front. Photo: Indranil Bhoumik/Mint

Coal India Ltd (CIL) had a good year on the production and offtake (sales volume) front. See the chart alongside. Production and offtake growth for fiscal year 2016 were 8.6% and 8.8%, respectively. Sure, the company missed its targets but FY16 growth is the highest in at least the past six years.

Still, investors haven’t given brownie points. Weak demand from the power sector, subdued price realizations and lack of price hikes are some factors that have kept sentiment muted for the stock. From its high of 443 in August, the stock has fallen as much as 38% to 276. It’s worth noting that CIL declared an interim dividend for FY16 worth 27.40 per share recently.

Nevertheless, what offers some hope is that demand from the power sector could improve as we enter the summer season. That in turn is likely to boost coal demand. “Central Electricity Authority data indicates 13-15GW (gigawatts) of annual power capacity addition based on domestic coal in FY17-19 period, which alone can drive 9-10% coal demand growth," points out JM Financial Institutional Securities Ltd.

And then, about 50% of current coal imports is to offset the shortfall in domestic production, added the brokerage firm. “Barring seasonal anomalies we believe coal demand will keep growing structurally," JM Financial said in a report. Needless to say, if that pans out, CIL will benefit.

Currently, one CIL share trades at about 11 times estimated earnings for FY17. While valuations seem to be factoring in most of the negatives, what are the triggers?

With dividend now behind us and a forthcoming wage hike in July, focus would shift to FSA (fuel supply agreement) volumes price hikes, said Bhaskar Basu of Jefferies India Pvt. Ltd. “While there is uncertainty around price hikes, we believe market is already factoring in no price hikes," points out a Jefferies report on 3 April.

Accordingly, potential price hikes and news flow surrounding that will act as a trigger from a near-term perspective.

Having said that, slower-than-expected volume growth and lack of price hikes will pose downside risks to earnings estimates.

The writer does not own shares in the above-mentioned companies.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 07 Apr 2016, 12:19 AM IST
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