One of the safer bets in the market are mining stocks. The margins in the business are attractive and generally these companies are cash rich companies, which are zero debt. Whether, it is iron-ore mining company like NMDC or lead and zinc mining company like Hindustan Zinc, valuations are rather attractive. However, we are going to talk of Coal India for a moment and why the stock could be a good pick.
Coal India: Attractive on valuations
While skeptics have often suggested a change from Coal to cleaner fuel, we believe that coal demand would continue to stay robust. Coal would continue to dominate the generation of electricity for a long time to come.
Coal India is the world's number 1 coal mining company, with significant reserves in place.
For the quarter ending Dec 31, 2019, Coal India did not have a great performance, because of irregular monsoons, which impacted production and dispatch.
Profit for the Quarter (Before OCI) dropped to Rs 3,921.81 crores from Rs 45,66.81 crores. However, for the month of Jan 2020, Coal production is up almost 10 per cent, when compared to Jan of 2019. There is a possibility that this quarter may see a pretty decent performance from Coal India.
Solid on dividend yield
There is a high probability that the company would declare a dividend in March, 2020, given that so far for FY 2019-20, there has been no dividend declared. Based on last year's dividend, the yield at the current market price would be 7.5 per cent. Until March 31, 2020, any dividend received upto Rs 10 lakhs would be tax free in the hands of investors. This makes the stock attractive. Now, the dividend yield is much better than the interest rates provided by even State Bank of India on its fixed deposits, which is around 6 per cent currently.
Near 52-week lows
The share price of Coal India hit a 52-week low of Rs 167 and is very close to those levels and is trading at Rs 174. Given that dividends would be declared in the month of March, we expect a small rally in the share price.
The company is also a cash rich dividend paying company, with limited business risk. There has been some downward pressure on the stock due to the government's anticipated divestment. Over the next few years, we could well see volume growth of 5 per cent on a compounded annual growth rate basis from 2020-22.
From the table above, we could see that the share price is also way below the moving averages. This gives an opportunity to buy below the same. This is a stock that could be relatively insulated from a sharp downside in the markets.
Disclaimer: The article is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article. The author owns shares in ONGC.
About the author: Sunil Fernandes is the Managing Editor of GoodReturns.in with 25-years of experience. Prior to this, he has worked with frontline newspapers and magazines including Dalal Street Investment Journal, Deccan Herald, Hindustan Times, Oman Economic Review and Gulf Times.