Why do Coal India shares continue to be sluggish?

Coal India is the largest Indian public sector undertaking and is the largest miner of coal and operator of coal washeries. While the Coal India share has outperformed the Nifty50 by 56%, its long-term performance is still sluggish. Some of the reasons are as follows:

PSU Valuations

In the Indian stock market, PSU companies have been wealth destroyers over the last two decades, most of them trading at significant discounts to their intrinsic valuations. One of the primary reasons investors buy PSUs is if they either want to make a play on the commodities and utility sector forthe short term or for the regular high dividend yields some of these companies pay out. 

Coal India has a net cash reserve of Rs. 30,000 crore,which is expected to help the company battle its short term, being a PSU still allows the government to use money from the company’s cash reserves and funnel it into its reserves through share buybacks thus proving the “PS” in the public service undertaking tag.

Growth expectations

Global coal prices have crashed due to lower demand from the power sector, and the recent Russia-Ukraine war has shown many countries the need to move to cleaner, more renewable fuels. Unlike gas and other utility companies, Coal India is a commodities company. It is not cyclical even, unlike most other commodities businesses,which enjoy a consistently growing revenue stream, which is excellent for a company. Even medium term, India’s dependence on coal usage is projected to grow the industry by 5%. 

However, the consistent trend of share buybacks and high dividend pay-outs in a low-growth industry means that the company cannot find promising avenues to reinvest into its core business or effectively diversify to grow its revenue and profitability by a big enough margin. Companies atsuch rear end of their maturity cycles get less valuations. On top of this, the company has a massive employee cost, which it cannot bring down. In the next five years, employee costs are expected to be 40% of revenues.

Divestment woes

Additionally, the company has been consistently rumoured to be divested by the government for the last decade and yet has failed to do so, which is precisely the kind of uncertainty that market participants hate. The divestment being almost finalised is another bad news for the Coal India share price, wherein the stock has seen a significant dip in its share price because of the lack of demand for its offer for sale as part of the divestment.

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