Any cyclical business should be valued by book value. Somehow modern fund managers don’t care about P/B.
More here
An increase of 500 MT annually in 6 years roughly translates to 7% CAGR growth rate for the Coal Industry. Thats not very high! However, if we see in totality with
- Rise in coal prices over time (in line with inflation) will bring more to the bottom line.
- Cost reduction measures could bring in efficiency in profit margins.
- Revenue could start pouring in from diversification projects like coal gasification, power plants etc
- Green Targets - 3GW & 5 GW: The company plans to have 3GW of solar power capacity by FY26 and 5GW by FY29.
- And at CMP, a 6% dividend yield could altogether add to the returns.
With all these, there seems to be a possibility of Coal India giving 7% + 6% = 13% Minimum returns and Max could go 16-18% too. And this is excluding the prospects of re-rating.
Disclosure: Not buy sell recommendations. Invested at high levels.
What are the thoughts on this guys - https://indianexpress.com/article/india/jharkhand-govt-legal-action-coal-dues-centre-9731446/ - Stock price has significantly corrected after the legal proceedings came to light.
This is one of the concerns due to which to some extent stock might have corrected.
Also, as per their latest report they have achieved only 65% of Coal production target for FY25, and there is a possibility of missing out on the earlier target.
This stock will not go up in linear manner and there will be lot of ups and downs. This is based on my experience of holding it since Feb-Apr 2022, hence more caution may be apt even at current P/B of 2.5. I have booked profits at multiple levels during 2023 and 2024 and hence still able to hold with patience.
I may be wrong in my thesis and analysis.
I came across this information:
“The demand for the past dues will, however, be staggered in instalments over 12 years starting from April 2026.”
So, I believe they will add provisioning to accommodate the cost over a long period. The estimated royalties are expected to be 35000-40000 Crore, and this is an impact over a 12-year period.
While Coal India has reserves of more than 75000 Crores, financially nothing will impact its daily course of work. Additionally, there is a statement given by MD as follows:
“We are impacted in two states – Jharkhand and Odisha. In Odisha, there will be a hard hit of Rs 35,000 crore. In Jharkhand, the impact was Rs 350-400 crore, which is not a significant amount,” P M Prasad, chairman and managing director, Coal India, said.
About 75-80 per cent of the coal has been given to big plants with whom Coal India has FSAs. “If I can get 80 per cent reimbursed the impact will be around Rs 6,500-7,000 crore provided I can get it back,” Prasad said, on the sidelines of an interaction organised by the Bharat Chamber of Commerce.
So, Coal India is thinking of passing on the burden to its customers. This would further reduce the impact.
More here.
Shibu Soren is asking for 1.36 Lakh Cr even if 20% of that is payable will be a big impact on Balance sheet.
Very Excellent points put by you. @Prithviraj_Patil
Here is my gist of it in crisp bullet points:
Reasons Why Coal India may not perform
- no sustainable competitive advantage
- With advent of private mining, it will lose market share
- A cycle of diversification into critical minerals, power etc will lead to a capex cycle that will reduce ROCE
- No power on deciding the pricing of their product
- Significant regulatory risks
- Govt. Stake sell is another risk to the price movement
I have put this down in my notes too. Thanks for sharing your views.
Today I hear a discussion of Samir Arora on Groww youtube channel. He has 3 decades of experience in Market.
One Important pointer I heard from him was his exit Strategy. He Says something like this:
An Exit Strategy For Stocks: Comparing EPS Growth with Price Growth
- If price growth is happening in line with EPS growth, we can continue staying in stock.
- if price is not growing despite EPS growth, it means stock is becoming a value trap and we can exit.
- If price is far exceeding EPS growth, it means there is exuberance and it may fall back to mean. So you should exit.
In line with this, I put down some details on Coal India’s growth over last 3years. And this is what I found:
In Last 3 Years,
- EPS Growth = 192%
- Price Growth at CMP 386 = 147%
So if we look at it from the perspective of markets always revert to fair pricing, it is very much possible that COal India is currently at a discount and with growth prospects in place, it is likelier it may create enough of a lag to its EPS movement that it may start the upward trajectory.
Some views of money managers are not applicable to retail. They act as per their situation. They may continue holding something even if there is exuberance, because exuberance can continue.
Of course, as exuberance dissipates, price will fall, mean reversion can happen sooner.
Had a position in the stock, held for 3 years, saw it post its ATH, saw it come down by 40%, sold a month ago for good profit, bought again, have a small position now.
Parag Parikh Flexi Cap Fund holds 5.76% of Coal India.
This fund always surprises investors by their stock selections occasionally but has delivered over 20% + CAGR over long term. Their strategy of buying stocks trading below Nifty P/E has worked well in the past.
Probably, they are expecting better EPS growth in Coal India due to their expansion in non-coal areas over 5-6 years. We need to find their thought process for such high allocation to Coal India.
My view is that FY25 will not be a good year for Coal India, as realizations will continue to fall impacting EPS growth which will move downward. After that, we need to watch for their targets for FY26 and FY27 and see early signs of improvement in Realizations, Volumes and EPS growth, only then further direction will become clear.
This will be a Dividend Yield Low EPS growth stock till that time.
Disclosure: Reduced the position during 2023 and 2024 and Holding the balance position for high dividend yield to support Dividend Yield at portfolio level. I may be wrong in my analysis.
Check above YT video from 1:29:55 onwards
Specifically w.r.t Parag Parikh Flexi-cap thinking behind holding this stock brief reply by fund manager. Video from the yearly unit holders meet.
I don’t know how many other fund houses hold these and explain rationales behind specific stock picking and other clarifications. Maybe I’m ignorant about the rest of them.
Have always admired the team at Parag Parikh for their strong conviction contrary to market euphoria(sitting on 20% Cash and equivalent) when almost everybody in the industry is invested almost fully and even analysts were doubting their strategy.
Also notice that unlike other AMCs they have only 2 primary equity focused funds (Flexi cap and ELSS) when most other fund houses are milking new themes/NFO’s(EV’s, Railway index, etc) using NFO’s.
Disclosure: invested at lower levels
Thanks Swaroop for highlighting the video. I have not seen it this year. Generally I always appreciate their philosophy of investing.
My thesis of remaining invested in Coal India, (after booking partial profit at P/B > 5.0), is more or less same as Parag Parikh Management.
Dividend Yield of > 6% is one of the reasons for holding in my portfolio, apart from upside due to P/B multiple increase if at all it happens.
Thanks for pointing out the video again.
this was a great great post. I had a similar thesis, I think the current divided yield with +/-25% range we should expect for the next 5 years at least - which is a safe bet minus any price appreciation
Can someone shed some light on pricing mechanism under FSA?
How is pricing of coal determined and regulated in Fuel supply agreements (FSA) under New Coal Distribution Policies (NCDP)?
Does the international prices of Coal affects pricing mechanism under FSA?
I understand that much of the prices are regulated and fixes by Ministry of Coal and GOI and hence are regulated but is there any provision or for prices adjustments considering the coal production output, international prices etc?
ishmohit @Worldlywiseinvestors also spoke about the reason around Coal India
February updates aren’t great.
Production was marginally lower by 0.9% offtake even lower by 4.8% vis-a-vis last year which chairman is blaming on availability of lower rakes due to Mahakumbh.
They are now expecting a production of 788 million tonnes and an offtake of 765 MT for the current fiscal year ending March 2025
The initial production target was 838 MT, which was revised to 806-810 MT in January.
They have now set a target of 868 MT which should be taken with more than a pinch of salt considering the recent perfomance.
The other joker in the pack will be now that Trump is in power and pushing for it, what happens to coal prices once there is an anticipated resolution to the Ukraine-Russia war. Coal prices got a significant boost during the war leading to higher e-auction prices for coal India during the period, albeit it’s a small contribution at around 10% of volume.
Some of the pressure on price may get stabilized by Trump’s policy of encouraging new coal plants Trump pumps coal as answer to AI power needs but any boost could be short-lived
and possible relook by other countries whose energy transition plans have been hit by Trump’s withdrawal from the Paris agreement for the second time.
Interesting times ahead indeed!
Disclosure: invested and hopefully not biased
MASTERCLASS on Value Investing with Prof. Sanjay Bakshi | RARE INTERVIEW! .
Sanjay bakshi talking about the undervaluation coal and fossil fuel stocks.
Coal+India±+company+update-Jun-25-NUVAMA.pdf (407.5 KB)