The Future of Coal India: A Long-Term Bet or Not?
Campaigns for renewable energy sources have gained momentum around the globe. However, the reality is that coal still plays a significant role in India's energy production, with Coal India being one of the largest players in this sector. This article explores the future prospects of Coal India, questioning whether it can be considered a long-term investment opportunity.
Current Position and Performance
Coal India, a flagship company of the Indian coal sector, has made significant strides. It has produced 602 million tonnes (mt) of coal in financial year 2020 and aims to increase that to 1000 million tonnes (mt) by FY23-24. These targets reflect the company's ambition to dominate the coal market in India and possibly beyond.
In Q3 of fiscal year 2021, the company's consolidated revenue grew by 11.4% quarter over quarter (QoQ) due to increased volumes as demand recovery. However, the full sales obligation (FSA) revenue increased only by 9.2% QoQ, a drop of 7.4% year over year (YoY). These figures highlight the importance of volume growth in sustaining the company's financial health.
Dividend Yields and Futures
Coal India's stock performance and dividends are also noteworthy. Since February 2011, the company has declared a total of 17 dividends. In the past 12 months alone, Coal India declared an equity dividend of Rs. 19.50 per share. At the current share price of Rs. 151.10, this dividend translates to a 12.91% dividend yield, indicating a robust return on investment.
The company recently announced an interim dividend of Rs. 5 per share, reinforcing its commitment to sustainable and reliable dividend payouts.
Strategic Initiatives and Cost Control
To ensure long-term success, Coal India is actively exploring diversification projects and investing significantly in mechanizing the evacuation system. With a capital expenditure (Capex) guidance of Rs. 13,000 crore for FY21, the company plans to spend Rs. 9,300 crore by January 2021. These efforts aim to reduce operational costs and improve efficiency, which are crucial for sustaining profitability.
However, the company has faced challenges such as increased provisions of Rs. 503 crore in Q3FY21, up from Rs. 354 crore in Q2FY21, mainly due to unrecovered dues from government entities. Despite this, management expects a gradual recovery in the coming quarters.
Professional Outlook and Valuation
Analysts have a mixed view on the stock, with a consensus on the potential for short to medium-term growth. 6 analysts giving long-term price targets for Coal India expect the stock to hit an average of Rs. 175.75. This represents an upside of 4.40% from the current price of Rs. 151.10.
Moreover, mutual funds have been increasing their holdings in Coal India, moving from a 9.36% to a 9.46% share in the December 2020 quarter. This increase signals more institutional confidence in the company.
Long-Term Prospects and Realization Improvements
The future of Coal India is not only about production volumes but also about improving realization. As India's energy demand continues to rise, particularly in the power sector, the company stands to benefit. Management's assurance about the potential for improved realization and better margin protection through enhanced efficiency is a positive sign.
Conclusion
While the push towards renewable energy sources is undeniable, Coal India remains a significant player in India's energy landscape. The company's robust financials, ongoing strategic initiatives, and the recent dividend announcements make it a promising investment for the long term. However, investors should carefully consider the risks associated with the coal industry in the context of the growing renewable energy trends.
The future of Coal India is partly dependent on the pace at which the country transitions to cleaner energy sources and how effectively the company can adapt to these changes. For those willing to take a long-term view, Coal India might offer attractive investment opportunities.