Can Coal India Crash to Rs 300 Per Share?

Feb 26, 2024

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Can Coal India Crash to Rs 300 Per Share?

Has the PSU giant Coal India been a wealth creator or a wealth destroyer?

Well, it depends to be honest. And ironically, those who have been holding the stock for close to 9-10 years have reason to be disappointed than the ones who bought 3-4 years ago. So much for the magic and the benefit of long-term investing.

If you look at the 10-year price chart, Coal India's price back in July 2015 was the same as it is today.

Yes, that's right. After touching a high of close to Rs 450 per share back in July 2015, it is only now that the company has crossed this price.

Put differently, those who invested in the stock back in July 2015 would have broken even on their investments only now. Of course, the stock has been a generous dividend payer all these years and these dividends would have really come in handy for investors.

However, when you talk of capital gains or appreciation in the share price, the stock has spent almost a decade in the wilderness. The stock has gone nowhere for 9 years and is a huge disappointment for investors who may have bought it during the 2015-16 period or even earlier.

Contrast this with someone who invested in Coal India back in 2020 and right after the Coronavirus induced crash. He certainly isn't complaining. He would have seen his capital multiply by a whopping 4x in 3-4 years. Like most PSUs, Coal India has had a fantastic resurgence over the last few years, leading to the stock comfortably outperforming the benchmark index.

To be honest, while there were external reasons for the stock to perform poorly post 2015, a part of the decline was also Coal India's own doing.

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After coming in at a healthy Rs 143 bn in FY16, the company's profits nosedived the following two years and were cut into half by FY18 to just Rs 70 bn.

The consequence of this was that the stock price also halved and fell from a high of Rs 440 in 2015 to a low of Rs 240 or thereabouts by 2017.

Well, the carnage did not stop there as the share price was once again cut into half by the time the year 2020 rolled in. So, effectively, if you assume that the share price was at Rs 100 back in 2015, it had lost 75% of its value over the next five years and had crashed to Rs 25 by mid to late 2020.

Interestingly, the profits did recover from a low of Rs 70 bn in FY18 to an impressive Rs 175 bn in FY19 but the share price did not.

You see, PSUs have not enjoyed a good reputation for quite some time now and hence, investors were unwilling to give high PE multiples to a stock like Coal India, especially after its profits were cut in half from FY16 to FY18. So, even though profits came roaring back in FY19, investors were not impressed.

Secondly, a lot of the institutional investors, especially the FIIs stayed away from the stock on account of coal's reputation of being environment unfriendly.

The company found itself to be a pariah amongst fund managers and chief investment officers whose mandate was to invest in stocks with a high ESG score.

And this was also the reason why Coal India did not recover and continued to reach new lows despite an improvement in its operating performance.

Just to put things in perspective, at its absolute bottom, the stock had fallen to close to Rs 110 per share with a price to earnings ratio of a mouthwatering 4.8x.

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A government monopoly with a teflon-coated balance sheet and a dividend yield of almost 10% was there for the taking. However, investors seemed to be busy playing, 'once bitten, twice shy.' And I don't blame them. Coal India's PSU status and the uncertainty surrounding coal as a source of energy, would have made even the most accomplished investors nervous.

However, there are many investors who also believe that if a decent quality stock is trading so low that all the negatives are already priced in, then one should certainly take one's chances with such a stock.

Well, Coal India fitted this description to the tee. It is certainly a decent quality stock what with its market leadership and financial strength. And then when it fell to Rs 110 or thereabouts, all the negatives also seemed to be priced in.

Hence, investors took their chances with the stock, hoping that a catalyst or two might just give the stock price a shot in the arm and this is precisely what happened.

Not only did its financial performance start improving but it also began to dawn on investors that writing the obituary of 'coal' was perhaps too premature.

Coal India's EPS jumped from Rs 21 in FY21 to Rs 28 in FY22 and then to a whopping Rs 46 per share in FY23. In other words, its EPS more than doubled in a short span of two years, supported both by higher volumes as well as realisations.

What is more, the investing community also began to realise that given India's rapidly growing thirst for power and the slow pace of capacity augmentation in renewables, thermal power plants will continue to play an important role and consequently, demand for coal will also go up.

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Put differently, coal will keep playing an important role in the country's energy matrix. So, these couple of important factors combined with Coal India's own efforts at reducing its carbon footprint, has rekindled investor interest in company's shares. This has led to the company's share price going up by more than 4x since its lows of October 2020.

And in an interesting example of how the sentiments quickly change, most brokerage houses are now positive on the stock. This is in stark contrast to the largely lacklustre reports that the very same brokerage houses used to churn out few years back.

However, there's one report that has predicted dark days ahead for the coal mining behemoth. In fact, it has argued that the company's stock could crash to Rs 300 from the current levels. The report feels that there near term pressure on the company's earnings on account of an expected drop in average realisations. It has also flagged long term headwinds such as easing of coal prices globally, growth in renewables, greater efficiencies and private sector competition, as the key reasons behind the steep fall anticipated in the company's share price.

Please be noted that a lot of other brokerages are positive on the stock and have also increased their target price for Coal India.

Coming to my own view point, well, I like to divide my analysis of any stock into external and internal factors. Externally, there's only one thing that I look at when evaluating stocks i.e. valuations. Are the valuations reasonable? Or are they too high or too low? Coming specifically to Coal India, the stock currently trades at a PE ratio of around 9x its trailing twelve-month earnings. This is certainly not expensive if one compares it with other stocks. In fact, the company's own median 10-year PE stands at around 11x. Hence, it does look slightly undervalued in comparison to its own long term median PE.

When the stock crashed from Rs 450 to Rs 110 over a span of 5 years, Coal India's PE at its peak was around 20x.

Thus, right now, it is nowhere close to that point. In fact, it is currently trading at less than half of that. From a valuation standpoint therefore, the risk of a big crash in the company's stock price does appear to be on the lower side unless there is a crash in the entire stock market.

As far as the internal factors go, these are more difficult to analyse and they are mostly about what the earnings per share of the company will look like 1, 3 and 5 years from now.

Here, I try to follow the Warren Buffett's motto of trying to be approximately right than precisely wrong. Put differently, don't try to be too precise while trying to arrive at the company's EPS few years down the line. A broad approximation will work just fine.

So, here's what we should do. We should try to answer the following set of questions with a simple 'yes' or 'no'.

Are the company's valuations so high that a small drop in earnings can lead to a huge fall in the company's share price?

Also, are the company's valuations so low that a small rise in earnings can lead to a huge rise in the company's share price?

Well, my answer to both the questions would be a big 'No' in my opinion.

Neither are valuations too high, nor are they near the lows of 2020. Hence, the best option in such cases is to have a wait and watch approach.

One should wait for few quarters and see how the earnings pan out. If they improve a good deal, then the share price will most likely go up. And if they fall then the share price may also fall a bit.

I guess the days of easy money in Coal India seem to be behind us. But that doesn't mean one should exit the counter. A good judgement with a cool head is your best bet currently.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter

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2 Responses to "Can Coal India Crash to Rs 300 Per Share?"

KVSS Raju

Feb 26, 2024

Good Analysis

Like (1)

Prashant Babar

Feb 26, 2024

Informative

Like (1)
  
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