Coal India Stock’s a Good Pick if it Falls Any Further
Even though there could be pain in the near term, co’s volumes are likely to pick up after a few months; high dividend payouts are added incentive
ET Intelligence Group: Coal India’s stock is down 5% since the company announced its muted dispatch numbers for March. But any further decline will provide a good opportunity to buy as the drop in dispatch appears temporary.
Although the near-term trend is likely to remain muted, Coal India’s volumes are expected to pick up after a couple of months. Besides, high dividend payouts resulting from its business with high cash flow are major incentives. Production and dispatch volumes are expected to remain high
After the Modi-led government assumed power at the Centre in May 2014, the volumes picked up sharply and the trend has sustained for the past several months. In 2015-16, the growth in productionwas8.6%andindispatchitwas 8.8% over that in the previous year. However, the low production and dispatch growth of about 3.5% in March wasduetostrongdispatchgrowthfrom September 2015 to January 2016, ranging from 9% to 15%, which resulted in high inventories at the power plants. According to the data available, the stock with the power plants is 27 days compared to 18 days a year ago. So the dispatch should pick up once the inventory comes down.
Another important thing is that the imports have been slowly getting replaced. Earlier, despite having an agreement with CIL, companies were forced to import due to low availability of domestic coal. However, the imports came down about 8.5% in 2015-16. Besides, the financial position of state electricity boards, which curb their production due to inability to pay, will improve gradually due to UDAY (Ujwal Discom Assurance Yojana), which industry says is proceeding smoothly. There is a concern that Coal India may not get pricing power due to weak international coal prices. However, that is already factored in the price and various analyst estimates. The surprise could be from the non-power sectors where CIL enjoys a better pricing power through e-auction. Non-power sectors account for about 30% of the total coalconsumptionandrelyonimported coal. But the trend has been that these sectors are gradually moving towards domestic coal or coke. Cement and steel arethemajorcoalconsumingnon-power sectors. Cement demand has already picked up and demand for domestic steel is also expected to pick up following imposition of several restrictions on imported steel by the government. In March, Coal India announced a dividend of ₹ 27.4 on a price of about ₹ 320, a dividend yield of 8.5%, which is one of the highest among the BSE100 companies. Given the high cash flow nature of the business and cash-rich balance sheet, a yield of above 6% can be expected for the next few years.
In this backdrop, a further fall in stock price will be an opportunity for investors looking for stocks with high dividend yield and 10-15% stock price appreciation annually. Analysts expect Coal India’s net profit to grow 20-25% (10-12% CAGR) in the next two years.