Why Coal India Share Price is Falling

• If things go as expected, Coal India can end up giving good returns over the next 1-2 years.
  
  In fact, my back of the envelope analysis tells me that the upside could be as high as 80-100%. That is a gain of almost 2x.

This is what Co-head of Research at Equitymaster Rahul Shah wrote back in December 2022.

Well, so far in 2023, the stock is only up around 3% which means it still has a lot of ground to cover before the calendar year ends.

On top of this, the stock has recently witnessed a mild sell-off, falling around 7% in the past two days.

Let's take a look at the reasons behind the selloff and what lies ahead for the monopoly stock.

Why Coal India Share is Falling

#1 OFS Effect

On Wednesday this week, the government announced an offer for sale (OFS) in Coal India as part of its disinvestment plan.

An OFS is a simple method wherein company's promoters can sell their shares and reduce their holdings in a transparent manner through the bidding platform i.e., the exchange.

The government will sell a 3% stake in the company, and the OFS will remain open for two days. Around 92.4 million (m) shares will be the base offer while it will also have the option to additionally sell 92.4 m shares in the event of oversubscription.

This fundraising exercise will help the centre get close to its target by Rs 42 billion (bn).

The OFS opened on Thursday for non-retail investors, and Coal India shares fell nearly 5% in early trade yesterday.

Now a stock can fall when an OFS takes place due to several reasons...

First, there's an increased supply of shares. When many shares are suddenly introduced to the market through an OFS, it increases the overall supply for trading.

Also, with more shares available, each individual shareholder's stake in the company becomes a smaller percentage of the total outstanding shares.

The pricing of an OFS can also influence the stock price, i.e., if the shares are priced at a discount to the prevailing market price.

So the actual reason behind the recent underperformance could be the OFS effect that stays for a couple of days till the offer is open.

#2 Quarterly results effect

The other reason why Coal India share price is underperforming the market could be due to its Q4 results.

Last month, Coal India reported an 18% decline in its net profit at Rs 55.3 bn on top of a 17% growth in revenue.

Net profit was lower as the company made higher provision for wage revision of employees. Wages of non-executive workers are revised every five years. The hike is due from July 2021.

In 2017, Coal India signed a wage agreement with worker unions proposing a 20% hike in salaries for five years.

Following the results announcement, analysts flagged concerns regarding declining margins in the current financial year (FY24).

What next?

While quarterly numbers came in lower, the yearly topline and bottomline figures were off the charts.

For the financial year 2023, the company posted a 62% growth in net profit at Rs 281.3 bn.

As expected, the company's board declared a hefty payout of Rs 4 per share as final dividend in addition to previously declared interim dividends of Rs 15 per share and Rs 5.25 per share.

Going forward, the demand for coal is seen rising on the back of enhanced power demand for rural electrification.

Yesterday, institutional investors put in bids worth Rs 65 bn against the OFS size of Rs 42 bn. This enthusiastic response shows the company has some positives in its favour.

The company recently announced an 8% hike in prices of major coal grades, which may give it an additional income of around Rs 27 bn according to reports.

Also, with power demand expected to triple by 2040, fossil fuels, particularly coal, are poised to see continued growth even as the clean energy market thrives.

How Coal India share price has moved recently

On a year-to-date (YTD) basis, Coal India share price is up 3%.

In the past five days, the stock has fallen around 7% while it's up around 15% in the past one year.

Have a look at the table below which compares Coal India with its peers.

Comparative Analysis

Company	Coal India	Ashapura Minechem	GMDC	NMDC	Sandur M
ROE (%)	49.2	18.2	9.1	24.5	14.0
ROCE (%)	63.1	13.8	16.7	34.1	18.5
Latest EPS (Rs)	45.7	12.8	38.2	19.1	100.3
TTM PE (x)	5.0	10.0	4.4	5.6	11.8
TTM Price to book (x)	2.5	1.8	0.9	1.4	1.7
Dividend yield (%)	10.5	0.4	5.4	6.2	0.4
Industry PE	5.7
Industry PB	2.2

Data Source: Equitymaster, Ace Equity

Interestingly, Coal India share price was experiencing a similar downtrend back in March 2023. And the reasons back then were different.

Continue reading...

Why Coal India Share Price is Falling (March 2023)

Monopoly stocks, over the years, have had a history of scorching returns. This is because these companies are challenging to compete with and maintain the highest market share for their products and services.

With high barriers to entry, high capital requirements, or a business advantage, they are market leaders in their industry with zero or less competition.

But with ongoing correction in Indian share markets in 2023, even the traditional cheetahs of the bourses have fallen. One of them being Coal India.

The share price of Coal India has eroded over 5% so far in 2023, declining 4% in the past five days alone.

Here is what has led to the sudden change in share price momentum.

#1 Outstanding dues

India's power sector owes Coal India a lot of money in outstanding dues. Over the last year, this has increased by 25% from Rs 133.3 bn in March 2022 to 166.3 billion (bn).

The timely payment of dues to the coal sector is crucial to ensure a constant supply of fuel to thermal power plants. Last year, the country faced a power crisis due to a coal shortage.

This lack of payment discipline causes supply-side problems in generating electricity, further affecting new investments in the sector.

Following the update, the shares of Coal India have been on a downward spiral, declining % in five days.

#2 Low Coal prices impacting financials

Over the last five years, the company's coal prices have stayed relatively constant despite rising costs of production. The last price hike by the state-owned miner was in January 2018, with a little over 10%.

Due to this company's financial condition, especially for a few subsidiaries like Eastern Coalfields, Western Coalfields, and Bharat Coking Coal are getting impacted where the manpower cost hike has taken place.

These low rates have further intensified the financial pressure as the company has been already losing money due to increasing competition from renewable energy.

To offset these rising costs of production, including wages, fuel and transportation expenses, the company is closely working with stakeholders to ensure the price hike.

How the development pans out remains to be seen.

Long term outlook looks positive

Going ahead, Coal India has said that it hopes to supply 156 million tonnes (MT) of coal to the power sector in the June 2023 quarter.

This would be 25.6% of the enhanced annual dispatch target of 610 MT slated for the sector in 2023-24.

Further, Coal India has estimated an incremental production of 80 MT in 2023-24, taking the total production target of the miner to 780 MT.

This includes supply to both the power and non-power sectors. Coal India hopes to end 2022-23 with a total production of 700 MT.

The company also plans to set up coal production from underground mines from around 30 MT to 100 MT by 2030.

Also, with power demand expected to triple by 2040, fossil fuels, particularly coal, are poised to see continued growth even as the clean energy market thrives.

Coal India being the largest domestic producer, is set to benefit from it.

To dwell deeper, check out Rahul Shah's detailed editorial on Coal India. It explains why the bluechip stock could offer great returns in 2023.

How Coal India shares have performed recently

Coal India shares have declined by more than 4.7% in past week. So far in 2023 the stock is trading down by 5%.

The company touched its 52-week high of Rs 263.4 on 9 November 2022 and its 52-week low of Rs 164.7on 12 May 2022.

At the current price, the stock is trading at a PE multiple of 8.5 and a price-to-book value multiple of 7.6.

About Coal India

Coal India was incorporated in 1973 as Coal Mines Authority after the nationalisation of the coal sector.

It was reconstituted as a formal holding company with the present name in November 1975.

The company has eight wholly owned Indian subsidiaries: Bharat Coking Coal, Central Coalfields, Eastern Coalfields, Western Coalfields, Northern Coalfields, Mahanadi Coalfields, South Eastern Coalfields, and Coal Mines Planning and Development Institute.

It has a wholly owned subsidiary in Mozambique, Coal India Africana.

Coal India was conferred the Maharatna status by the Indian government in April 2011. The status provides operational and financial autonomy.

Additionally, seven of its nine wholly owned subsidiaries have been accorded the Miniratna status, leading to decentralisation of operations and decision-making.

In October 2010, the government divested 10% stake in Coal India for Rs 154 bn through an initial public offering (IPO).

Over the years, the government has divested stake through offer for sale (OFS), by way of placement of shares in Central Public Sector Exchange Traded Fund and buyback of shares through offer for sale.

For more details about the company, check out Coal India company fact sheet and quarterly results.

You can also compare Coal India with its peers.

Coal India vs NMDC

Coal India vs Vedanta

Coal India vs MOIL

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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