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McClatchy-Tribune  07/15/2014 12:01 AM ET
Coal India stock back to reality with a thud [Mint, New Delhi :: ]

July 15--Good things take time to happen. Probably that's what investors of Coal India Ltd have realized as far as its production/sales volume growth is concerned.

Hopes that the new government will take steps to expedite project clearances, resolve land acquisition-related problems and, accordingly, boost production had led to considerable enthusiasm in the stock.

But Coal India shares have declined by about 15% after touching a high of Rs.420 per share on 10 June. During the same period, the benchmark Sensex fell by about 2%.

A key reason for the underperformance is the company's disappointing volume numbers for the June quarter. Sure, Coal India posted a year-on-year (y-o-y) growth in production and sales volume of 5.3% and 3.7%, respectively, for the June quarter. While that looks attractive, the fact of the matter is that the company has again fallen short of its target. Coal India achieved 96% and 91% of its production and sales volume target, respectively.

As JP Morgan analysts pointed out, while market excitement is high on large volume growth for Coal India, they believe the first quarter numbers highlight that it is a tough task and, more importantly, a big recovery is unlikely in the next few quarters.

Moreover, the outlook on rail volumes (the major transportation mode for Coal India) is not particularly rosy from a medium-to-long-term perspective. The company's rail volume growth is not likely to exceed 25 million tonnes per annum (mtpa) over the next two-three years, primarily due to production and land challenges, according to Edelweiss Securities Ltd.

"Further, the three key railway lines -- in Jharkhand, Chhattisgarh and Odisha -- capable of evacuating about 110 mtpa of coal (in phase I) are likely to start only in FY18, considering chronic delays. Hence, we perceive downside risk to our 30mt/35mt volume growth assumptions for (Coal India) in FY15/FY16," added Edelweiss in a note on 10 July post interactions with the railways ministry.

All this means that a meaningful improvement in the scenario could very well take time. Investors would do well to track the progress on the above three railway lines as they are important for the company's future volume growth.

Meanwhile, reports suggest that Coal India may consider raising prices to pass on the recent increase in clean energy cess in the Union budget and, in general, the higher diesel costs. That should offer some support to profit margins. But Coal India's June quarter results are unlikely to be very encouraging. The company's net profit is expected to see flat to single-digit growth on a y-o-y basis on account of lower other income and lacklustre revenue growth. Currently, the stock trades at 13.3 times its estimated earnings for this fiscal.


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