Positive support from Government:
Lack of domestic coal availability has led India to rely on imports in the past.
Coal imports by Indian power producers surged 51 percent to around 65 million tonnes between FY14 and FY16.
That is likely to change with Shakti (scheme to harness and allocate coal transparently in India), the new coal policy for the power sector approved by the Cabinet Committee.
Shakti aims to ensure that all the power plants are supplied coal as per the linkages provided. The new long-term fuel supply agreements will be signed with competitive tariffs. It will benefit plants that have signed power purchase agreements on the basis of imported coal.
State-owned power companies have already cut their imports from 25 million tonnes in FY16 to 12 million tonnes in FY17 and are targeting near-zero imports this year.
Coal India could be a big beneficiary of this policy, especially with the government focusing on increasing its production. Coal imported by power generation companies is equivalent to 12 percent of Coal India’s production of 547 million tonnes in FY17. While the entire imports may not immediately fall to zero, a 10 percent growth in Coal India’s output will support a large part of the demand for domestic coal.
The same should reflect in 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 underperformer in the past year. At the current price of Rs 277 a 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 zero debt.
The monthly chart attached shows that price has come down to the previous important swing support around 272 levels. At 263-65 we also have A-B-C pattern of its previous larger fall.
Stepping down to weekly time frame we find that price has just come at the support levels. There is CURRENTLY no indication of whether it will take support and rise or will breakdown. The momentum picture as shown by RSI is into bearish mode as RSI is below 40.
So lets step one more step closer and go to daily time frame. Over there we see that price has crossed the resistance line. And trading sideways post the fall.
Thus so far there is no evidence of bottom. But the government action is well positive and hence we should have a watch on this stock. As it may give good low risk bet currently.
So lets look at what we should expect price to behave if it needs to reverse.
Firstly, it should hold the support well.
Then we should see some short covering action or buying which could be seen in terms of price rise and volumes supporting.
Some divergence pattern in momentum or some signal about range shift in further lower time frame.
Reversal shown by candlestick patterns.
If all this happen then price may bottom and provide us with very good entry. So one should keep close watch on that