Is re-rating possible in this PSU stock?

Shares in mining companies have surged following the Indian government’s approval of royalty rates for strategic minerals such as lithium, niobium, and rare-earth elements. This significant decision paved the way for the government to auction mining blocks for these valuable resources for the first time in India. Notably, a 3% fixed royalty rate for lithium and niobium, and a 1% rate for rare-earth elements, have been established. These royalty rates are a pivotal financial factor for potential bidders in the forthcoming mineral block auctions. With India actively engaged in exploration for critical and strategic minerals, this development has ignited optimism and driven up share prices in the sector.

Stock and H1 FY24 Performance of Coal India

Coal India’s stock price has surged over 26% since August-end, hitting 52-week highs on the BSE. This rise is largely due to robust production and sales figures for September, bolstering confidence in achieving annual growth targets. Coal India’s H1 FY24 production increased by 11.3% YoY, with total supplies growing by 8.6% in the same period. The strong production momentum also enhances operating efficiencies. Notably, the company is expanding its non-power sector supplies, where it earns higher realizations. Supplies to the non-power sector in H1 FY24 saw a 40% YoY increase.

Other factors contributing to potential EPS growth include a rebound in e-auction realizations and premiums due to increased power demand and rising coking coal prices.

Stock Price Performance

Week: 4.08%
1 Month: 11.15%
3 Months: 37.15%
1 Year: 32.66%
Year till Date (YTD): 40.60%

Joint Venture of Coal India

The investment of Rs.1364 crore by Coal India in the Talcher Fertilizers joint venture is a strategic move aimed at reducing India’s dependency on fertilizer imports. Coal India’s participation in the project demonstrates its commitment to diversification and expansion beyond coal mining. While this investment will require federal cabinet approval due to the company reaching its investment ceiling, it signals the company’s intent to play a significant role in the fertilizers sector. This diversification could potentially have a positive impact on Coal India’s overall earnings, contributing to its financial health and share price.

The development aligns with a broader effort to enhance the production of nitrogen-based urea fertilizers domestically. As India imported a significant quantity of fertilizers last fiscal year, reducing dependence on imports has economic and strategic advantages. If the Talcher Fertilizers project succeeds in achieving its production goals, it could bolster Coal India’s financial performance and, in turn, positively influence its share price, making it an attractive proposition for investors.

Possibility of Re-Rating

The impressive performance and growth prospects of Coal India, as evidenced by its remarkable H1 FY24 results and optimistic estimates from brokerage houses, raise the question of whether a re-rating is possible in this PSU (Public Sector Undertaking) stock. The company’s strong production, expanding supplies to both the power and non-power sectors, increased auction premiums, and dividend yield expectations have attracted substantial investor interest, propelling its stock to new heights. With a focus on diversification and a strategic joint venture to reduce dependency on fertilizer imports, Coal India is positioning itself for long-term success.

While past performance and current factors make a compelling case for a re-rating, it ultimately depends on sustained growth, operational efficiency, and adherence to expansion plans. If these elements align, Coal India could indeed see a re-rating, making it an even more attractive investment in the PSU sector.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.