Coal India Fairly Valued, Big Margin Expansion Unlikely: Morningstar

Coal India is back in investors radar. Shares of Coal India have rallied over 7 per cent in the past one month and 18.2 per cent in three months.

Many analysts say that Coal India is poised to see a big production growth and margin expansion over the next five years. But Morningstar India differs.

Piyush Jain, equity research analyst at Morningstar India, told NDTV that though Coal India may see a jump in volume growth, its margins are not likely to see a significant improvement.

Mr Jain says Coal India may not be able to hike prices aggressively in the backdrop of a slump in global prices.

Also, Coal India will face opposition from power producers, he added. Since the finances of many state electricity providers are severely stressed, power producers will have limited ability to pass on higher cost, Mr Jain said.

Mr Jain sees average operating margins of Coal India remaining around 22 per cent over the next five years, similar to its last three-year average.

The wage hikes will also impact margins, he added.

According to Mr Jain, Coal India shares are fairly valued at current levels and it should be seen as a dividend play.

The recent gain in Coal India shares have been attributed to the rising production in the first two months of this fiscal. Coal India's production has jumped nearly 11.8 per cent in April-May. In 2014-15, the company's total coal production increased by 31.81 million to over 494 million tonnes, recording nearly 7 per cent growth over 2013-14.

Mr Jain argues that despite production growth, offtake from Coal India mines could not see a proportionate growth because of infrastructural bottlenecks. It takes time to build linkages like rail tracks, he added.

The government aims to double Coal India's production to 1,000 million tonnes in next five years. Morningstar estimate of 930 million tonnes is also close to the government's target.

But Mr Jain sounds a note of caution: Coal India has missed targets many times in the past.

Shares of Coal India ended flat on Friday as compared to a 0.30 per cent fall in Sensex.