So far, 2022 has been a year of bloodshed for the stock markets in India. Except for a handful of companies, most traditional cheetahs of the bourses have fallen flat due to changing market conditions induced by liquidity crunch and flight of foreign investors. But Coal India, to everyone’s surprise, is running on a different track and appears unstoppable.
The stock price of the Maharatna has surged 27 per cent, massively outperforming the Nifty 50 index which has corrected nearly 10 per cent this year.
The uptick in Coal India stock since the start of the year has come on the back of high demand for electricity due to severe heatwave conditions across several parts of India which fuelled an increased demand for coal to meet the acute deficit.
While the company stock has emerged as a timely hero, historically, its story has not been well appreciated by investors.
Promising Trailer
In 2022, Coal India has advanced 27 per cent thus far. However, even at Rs 185, the stock is still trading well below its initial public offering (IPO) price of Rs 245 when it went public in 2010.
At the time of listing the company was credited with launching India's biggest-ever share sale via IPO and got listed at Rs 342, rising 40 per cent against the IPO price of Rs 245 per share on the first day of trading on November 4, 2010. The stock went on to hit an all-time high of Rs 440 in 2015.
It was valued at 11.6 times price to earnings ratio and 3.6 times price book value which was at a meaningful discount to its peers in the utility sector. Loaded with good ratios at the time of listing, the stock got a strong response from investors, getting subscribed over 15 times allowing the government to offload a 10 per cent stake in the company for Rs 15,100 crore.
Since then, Coal India's gross sales have gone up consistently—from Rs 54,256 crore in 2010 to hitting an all-time high of Rs 1,47,665.96 crore in 2019 and Rs 1,34,530 crore in the financial year 2021.
Coal India's profitability has also climbed steadily over the years. In FY10, the company clocked a net profit of Rs 9,622 crore and touched a record high of Rs 17,466 crore in FY19. The profits, however, slowed in 2020 and 2021 owing to a slump following the Covid-19 pandemic and the subsequent lockdowns.
Despite a steady earnings trajectory, Coal India's stock has not performed well consistently.
What Led To The Flop Show?
So, why exactly have people been shying away from Coal India? High employee cost and low earnings before interest, taxes, depreciation, and amortization (EBITDA) margins, among other things are the reasons, analysts opine.
From Rs 17,732 crore in March 2010, Coal India’s employee cost more than doubled to Rs 38,698 crore in March 2021. Its employee cost ratio to gross sales came in at 29 per cent in FY21, data from Ace Equity showed.
When compared with its peer National Mineral Development Corporation (NMDC), Coal India’s number is much higher. In contrast, NMDC’s employee cost ratio to gross sales was 7 per cent during the same period.
"The only reason why people are reluctant to invest in Coal India is that its employee cost is very high compared to other public sector units which have employee costs well within 20 per cent of their revenue. In the case of Bharat Electronics Limited, it has not crossed 18 per cent and for NMDC, it is averaging 10 per cent over years. Coal India's employee cost is 40 per cent of its revenue," says AK Prabhakar, head of research, IDBI Capital.
In terms of the EBITDA margin, Coal India touched 16.63 per cent as compared with 59.51 per cent for NMDC in FY21.
“Mining is a 50 per cent-margin business and Coal India has been operating at around a 20 per cent margin for a very long time which is not liked by the market participants,” Prabhakar adds.
Hazy Future
In the first half of the year, the country witnessed long power outages due to the shortage of coal supplies at various thermal plants as several macro and global scenarios unfolded. The extreme heat conditions only made things worse. Amid the power crisis, the spotlight naturally fell on Coal India as the country scrambled for coal.
Ashish Chaturmohta, director, head of equity advisory research, JM Financials, says that to meet the demand and supply mismatch, the company is targeting to close the first quarter with a 35-million-tonne incremental production as compared to 124 million tonnes in the same quarter last year.
The current situation offers some hope for Coal India. In a recent report, brokerage firm ICICI Direct said that it expects Coal India's top line to grow at a compounded annual growth rate (CAGR) of 3.2 per cent while EBITDA and net profit are likely to register a CAGR of 6.3 and 5.6 per cent, respectively. It also expects the company’s consolidated EBITDA margins to hover at 24% for the next couple of years. ICICI Direct has a buy rating on Coal India for a target price of Rs 225 per share, indicating an upside of 20 per cent from Wednesday's closing price.
Having said that, there is another emerging villain in Coal India’s story—renewable energy. With Prime Minister Narendra Modi’s ambitious promise of India meeting 50% of its energy requirements from renewable energy by 2030, which was made at the 2021 United Nations Climate Change Conference (COP26) in Glasgow last year, there is a major threat to the future of Coal India’s business. The Modi government’s promise of reducing the total projected carbon emissions by one billion tonnes between 2021 and 2030, and bringing down the carbon intensity of its economy by less than 45% by 2030 may play the perfect anti-hero in this story. Given the risk to its future growth prospects, it’s pertinent to have doubts over the long-term upside of the company stock.
Gaurang Shah, Head Investment Strategist at Geojit Financial Services cautions the investors. Fresh investing in Coal India at current levels is not advisable as risk-reward is not favourable and if somebody is holding the stock at lower valuations, they can hold it for a target price of Rs 210 per share, says Shah.
“We have a positive coverage this year. Coal India may have been an outperformer but historically a lot of people have lost wealth considering its listing price and what it is currently trading at. We have restricted our target price to Rs 210. Risk reward is not favourable if somebody holding the stock at a lower valuation can hold on for the target,” Shah adds.
Investors should not accept miraculous returns from the stock given the headwinds in terms of reduction in coal consumption. Moreover, the power generation plants are also switching to gas as an alternative clean and green fuel. It is a government-owned company, and the dividend payout ratio could be better but that is not the reason why people invest in stocks. They also invest in price appreciations. There are better sectors and stocks given the correction in markets rather than looking at Coal India as a fresh investment, Shah summarises.
