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

The Economic Times - - Smart - The Div­i­dend Fac­tor & Val­u­a­tions

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.

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