Coal India's stock

What is keeping Coal India's stock down despite improving fundamentals?

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Coal India’s fundamentals are improving

- The government’s stock sales have been a dampener- An earnings upgrade is in the offing- The concerns are already in the price

Why does Coal India’s share price keep falling despite improving fundamentals? One prime suspect is increasing share issuances. The government has brought down its stake from 80 percent in December 2017 to 72.91 percent in December 2018. It has offloaded close to 35 crore shares, leading to about 50 percent increase in its free float or non-promoter shares in the market. This is huge by any standard and is a massive overhang on a stock that has daily volumes of about a crore shares.

The market is also worried about the subsequent supply through PSU exchange traded funds (ETFs). In February, the government concluded selling its stake through the next tranche of Bharat-22 ETF, retaining Rs 10,000 crore, more than 2.8 times of the original issue size. Coal India has a 3.67 percent weightage in the Bharat 22 ETF.

Liquidity is a silent feature of stock investing and returns, which is often overlooked by the market. The market largely blames fundamentals.

Paradoxically, the fundamentals remotely justify such a correction in the stock. In the first nine months of the current financial year, coal production has grown 7.5 percent from the same period in the previous year. Over the same period, sales have grown 19 percent year over year and net profit has seen a spurt of 87 percent.

Beginning of an earnings upgrade cycle

Data suggest that over the last four weeks, eight analysts upgraded their FY19 earnings estimates for Coal India, against seven analysts who have downgraded their expected earnings. This may be an early sign that market is gradually taking note of the growth in earnings.

During the recently concluded December quarter, the company posted over 50 percent increase in profit to Rs 4,566 crore. This was higher by almost Rs 1,000 crore as against Street expectations of about Rs 3,600 crore.

What’s more, the company achieved close to 13 percent year-on-year increase in realisations from priority sector customers, such as the power sector.

Fundamental reasons for pessimism

But if everything is fine, what is the market worried about? There are also some fundamental reasons for concern. One of them is sluggish production. In Q3 FY19, the company’s overall coal production grew by three percent to 156 million tonne and offtake recorded a growth of two percent.

But its e-auction volumes, the more remunerative part of the business, dropped by 44 percent to 14.7 million tonne. The company earns close to Rs 2,850 per tonne of realisation for the e-auctioned coal, which is twice the amount it makes on volumes under fuel supply agreements (FSA).

The point to note here is that the numbers fluctuate on a quarter-on-quarter basis. Market conditions and operational hiccups in terms of scaling up production and logistic challenges to move the coal to customers often have a significant bearing on the numbers.

Let’s not forget that in FY19, the company is expected to clock a net profit of close to Rs 17,000-18,000 crore on net worth of about Rs 20,000 crore and cash and bank balances of close to Rs 32,000 crore.

Aren’t the concerns in the price?

The stock, which is trading about 8 times its FY20 estimated earnings and offers a dividend yield of close to seven percent, reflects low investor expectations.

In view of the excessive pessimism, the stock may remain rangebound for a while. But any positive development, either fundamental or a lessening of the worries over the government’s stock sales, can trigger a re-rating in the future.

Resource:- https://www.moneycontrol.com/news/business/moneycontrol-research/what-is-keeping-coal-indias-stock-down-despite-improving-fundamentals-3592061.html