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Cost control, output increase to fire up Coal India's numbers

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ET Intelligence Group: Coal India’s stock has lost 10 per cent from its peak on February 26 so far due to weak March quarter numbers. However, factors such as rising coal production, management’s commentary on cost reduction measures such as shutting down of unviable mines, reducing employee costs and attractive valuations makes risk-return ratio favourable for the stock. In the March quarter, production grew at a slower pace of 2.4 per cent yearon-year.

However, the growth rate improved significantly to 16.6 per cent and 15.7 per cent in April and May respectively, helped by higher production in subsidiaries.

The offtake was also strong at 13 per cent and 14 per cent in that order. Focus on reducing cost is another positive factor.

The company has undertaken measures such as shutting down unviable mines and reduction in overtime wages.

This should help in sustaining the operating margin in case the company finds it difficult to raise coal prices. Based on these factors, analysts expect 30-60 per cent jump in the operating profit before depreciation (EBIDTA) and net earnings for FY19.

At Thursday’s closing price of Rs 283.6, the stock was trading at 11 times FY19 expected earnings, according to Bloomberg consensus estimates. Its forward price-book multiple is eight times and the enterprise value (EV) is 6.4 times the forward EBITDA.

These figures are among the lowest since its listing in 2010 when compared with average annual valuation multiples. But what makes the stock even more attractive is its high dividend yield of 7.2 per cent based on Bloomberg’s dividend estimate of Rs 20.3 per share for FY19. In the end of March quarter, Coal India had cash of Rs 31,475 crore which translates into Rs 50.7 per share.

The cash balance is likely to improve with higher earnings expectations.




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