Any cyclical business should be valued by book value. Somehow modern fund managers don’t care about P/B.
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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.
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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.
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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.
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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.
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Shibu Soren is asking for 1.36 Lakh Cr even if 20% of that is payable will be a big impact on Balance sheet.
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Coal India is in a oligopoly but still has similar ROCE to SCCL. This suggest no sustainable competitive advantage, implying the returns are industry average. Plus with advent of private mining, it will lose market share. GoI intends to increase freight and buffer stock of coal leading to easing in imports and pricing.
Hence CIL and SCCL have only option to diversify into power, fertillizers, syngas production. These unrelated fields will lead to capex and further lowering of ROCE of the company and industry (power genCos have lower ROCE than coal miners).
Adding to this the fact that GoI is not a good business partner. They prioritise basis political agenda (syngas, rail, power) leading to lowered ROCE. Plus the corporate mis governance.
Adding to this, no pricing power, no economy of scale, no habit or branding. Only advantage is patent in the form of mining leases and high switching costs due to lowest cost coal. Efficient low-cost operations are emulated by all players.
There is significant regulatory risk in the form of contingent liability which cannot be evaluated. Thus despite a strong balance sheet, decent growth prospects, the move to diversify will reduce ROCE.
A low EV / EBITDA is no justification as the industry is politically driven. All companies are good investments at the right price, but considering the bad corporate governance and no clear direction, CIL is a pass at all prices.
PS: past 10-12 years returns are only dividend returns. The price returns are zero despite buybacks. The person with whom we partner when we buy the stock, i.e., GoI itself is selling out to monetise.
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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.
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