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Stock pick of the week: Analysts bullish on Coal India due to cheap valuations

Despite reporting flat volumes, Coal India’s net profits were higher than street expectations. This coupled with attractive valuations make the company a favourite of analysts.

, ET Bureau|
Sep 02, 2019, 06.30 AM IST
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While Coal India continues to report good numbers in other parameters, it disappointed on volumes.
The Coal India counter has been going downhill for several years now and its price is quoting close to all-time lows. On an absolute basis, its share price crashed 48% over the past five years, compared to the Sensex gaining 39% during the same time. Uncontrolled stock supply by the government, in the form of divestments, is the main reason for this disaster.

The recent deep cut, however, was because of the government’s decision to allow 100% foreign direct investment (FDI) in coal mining and related activities. As of now, FDI coal mining is allowed only for captive mining for power projects and Coal India is the only commercial coal miner. That means this increased competition will have a long-term negative impact on Coal India. Analysts, however, say its impact will be limited on Coal India due to several reasons. First, there will be a three to five years gestation period before coal production starts because of the lengthy procedures involved for coal licence allocation, land acquisition, environment clearances, etc. Second, it will aim to restrict coal imports, which jumped by 40% during the past one year.

While Coal India continues to report good numbers in other parameters, it disappointed on volumes. For example, its sales volume during the first quarter of 2019-20 remained nearly flat y-o-y and was down 6% q-o-q. However, Coal India is taking steps to improve coal production and analysts are expecting a small annualised volume growth of around 4% between 2018-19 and 2020-21. Despite the stagnant volume growth, its Ebitda and net profit were higher than street expectations due to better realisations in coal price and its net profit during the quarter zoomed by 22% y-o-y. Ebitda stands for earnings before interest, tax, depreciation and amortisations. Coal India’s efforts of keeping costs under control by shutting down old mines and increasing productivity at mines that are under operations are also yielding results.

Analysts are getting bullish on this counter now mostly because of its attractive valuations. For example, its enterprise value / Ebitda ratio is now placed around 3 times, significantly lower than its historical average of around 7 times. Similarly, other valuation ratios like PE, PB etc are also lower than its averages. More importantly, its dividend yield of around 7% is comparable to that of interest offered by many bank fixed deposits. With a cash pile of around Rs 31,000 crore—around 25% of its market capitalisation, Coal India is also maintaining high dividend rates.

Coal India compared with ET Metal and Sensex. Stock price and index values normalised to a base of 100. Source: ETIG and Bloomberg.

Selection Methodology: We pick up the stock that has shown maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.

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