Why Coal India is not winning over analysts despite gaining 30% over last year

The Street largely continues to be positive on the stock but the mood can best be described as ‘cautious optimism’, because of multiple factors

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Coal India has topped the list of Contrarian Downgrades in Moneycontrol’s monthly analyst tracker. This essentially means the stock price has gone up in the past year whereas analysts’ optimism in the stock has decreased.

Over the past year, the public sector undertaking’s share price has gained over 30 percent, buoyed by the rising demand for power, the spike in coal prices and a strong dividend yield of 10 percent. But during the same period, ‘Buy’ calls on the stock fell to 16 from 21, while ‘Hold’ and ‘Sell’ calls each increased from 3 to 4.

Largely, the Street continues to be positive on the stock but the mood can best be described as ‘cautious optimism’.

Check out January Analyst Tracker

Here are some factors driving the downgrades:

E-auction premiums fall
Brokerage firm Emkay Global recently highlighted that Coal India sells nearly 8-15 percent of its volumes each year in e-auctions, at auction-determined prices. These prices are linked to international coal prices for similar grades.

Now that international coal prices are falling from their highs, last year’s e-auction premiums, which were fuelled by the global energy crisis, will start tumbling. In fact, this has already started.

In December 2022, the monthly e-auction premium declined to 177 percent from 241 percent in November. Axis Securities is factoring in e-auction prices at Rs 2,575/t in FY24E versus Rs 5,046/t in Q3FY23.

Higher staff costs
Higher staff costs also pose headwinds for the company in FY24. After months of negotiations, Coal India and trade unions agreed to a 19 percent wage hike for 2.38 lakh non-executive employees, with benefits including overtime payments, leave encashment, attendance bonus, and a productivity and performance-linked bonus.

In FY22, Coal India’s wage bill stood at Rs 40,700 crore. After the implementation of the new agreement, it will be in the range of Rs 45,700-46,700 crore.

Analysts say this will further dent the company’s bottom line. Wage hikes could be passed on through FSA (fuel supply agreement) price hikes, but review of FSA prices are few and far between, they explained.

Also Read: Contrarian Calls | Adani Ports faces investors’ wrath after Hindenburg report, but finds favour with analysts

‘Cheap valuation a myth’
Coal India currently trades at FY24E EV/EBITDA and P/E of 3x and 5x, respectively. According to Emkay Global, this ‘cheap’ valuation is an illusion.

“These conventional valuation metrics are not applicable to a company that needs to invest sizeable amounts of operating cash flow every year just for maintaining its level of production,” it said in a recent report, pointing out that large long-term provisions are nearly 1.5 times the cash balance.

Emkay Global has initiated a Sell rating on the stock, with a target price of Rs 198 per share. Recently, Axis Securities also downgraded the stock from Buy to Hold with a target price of Rs 245. Foreign brokerage Jefferies, too, has a Hold rating with a target of Rs 225.

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