Coal India Limited | A Cool Player In Your Portfolio

CMP: 276.50. Both on NSE & BSE (19/05/2017)

Till now all the power generation companies are heavily dependent on the imported coal. Lack of domestic coal availability has led to this situation. The current import quantity is 65 million tonnes, which is almost 51 percent of the total coal requirements. If this surge continues, the day is not far away that, India becomes completely dependent on the imported coal for its power generation needs. Then, why Coal India? Of no use???

Shakti – The Power Policy to Reduce Coal Imports

In order to change this situation, ‘The Cabinet Committee for Economic Affairs’ has approved a new Coal Linkage policy called ‘Shakti’ – The Power. This policy is an auction based and  This is a scheme to harness the thermal power generation in India.

The total thermal power capacities in India, in the private sector tunes until 30,000MW. Out of which, 2/3 are equipped with ‘Long-term Power Purchase Agreements’ (PPAs). Shakti, the new power policy is going to benefit all these private players in the thermal power sector. Under this policy, all the thermal power generation companies with PPAs will get the right to get the fuel from ‘Coal India Limited (CIL)’.

A total 20.000MW private power generation sector is going to be benefited under the new policy. In 2009 CIL issued a ‘Letter of Allocation’ to few power projects. The total capacity of these power projects stands at 12,000MW. And, another 8000MW without LOAs, but with short-term ‘MOUs’ (Memorandum of Understanding). But CIL failed to provide the fuel.

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Coal India Limited is the Biggest Beneficiary

In this entire activity stream the biggest beneficiary is ‘The Coal India Limited’. It’s going to be benefitted @Goventment’s focus on the harnessing of power generation. The total import percentage of coal falls to 12% (547 MT) of the total Coal India’s production capacity in the financial year 2017. The target is to achieve zero imports. Just a 10% hike in Coal India’s production can make this possible to happen.

All the state-owned power companies have already reduced their imports. 25 million tonnes in FY16 to 12 million tonnes in FY 17. Targeting ‘zero-imports’ this year.

The aim of Shakti is clear. It ensures that all the power projects are supplied with enough coal as per the linkages provided. A  long fuel supply agreement will be signed off with competitive tariffs. It will benefit the plants that have signed Power Purchase Agreements on the basis of imported coal.

Benefits of Coal India Investors

The stock has been under-performing, since for the past one year. Currently trading around 277, almost a 52 week low, the stock is trading at 14 times of its fY18 earnings. This usually happens considering the huge cash in the books, zero debt and finally its monopoly in the sector

Analysts were expecting Rs. 15-17 per share earnings (EPS) in Coal India in the fiscal year 2017. But, this new policy has changed the number to Rs 20 per share. That’s how the investors are going to benefit.

The same should reflect on Coal India’s earning, which is expected to increase to about Rs 20 a share as against analyst expectations of about Rs 15-17 per share in fiscal 2017. The stock has been, a big under-performer in the past year. At the current price of Rs 277 per share, the stock is trading at 14 times its FY18 earnings, which is reasonable considering the huge cash in the books, its monopoly status in the sector and the zero debt.

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Till now Coal India has been a favorite pick of the dividend lovers. One who would like to park their capital safely under the roof of Giant Company that will securely pay off its return in the form of a dividend. A dividend yield of 10.09% is better than any bank fixed deposit. But, after the implementation of new coal policy, the tradition is going to be changed. It’s no more a dividend pick, but running to sit in the peer basket of growth picks.

Among the power companies, the immediate beneficiaries are GMR, Adani Power, Reliance Power, Vedanta, KSK Energy, CESC. Shortage of fuel linkages has led these firms and their power plants, operating at below financially viable levels.

Why to ‘Buy’?

Since for a month I’m feeling that the stock is going to sit in a technically bullish position. But, there was no fundamental support for my analysis. But, after the announcement of the Shakti policy, I’m recommending to buy it for your long-term portfolio. In the long run you will realize what is meant by ‘The power of compounding’, the success mantra of Mr Warren Buffet.


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Certified Financial Planner And Stock Analyst

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