This dividend stock recently became a wealth creator

Coal India has played the role of an anti-hero in the Indian stock market. It is the quintessential dividend stock. Between FY19-23, it has dished out 86 per cent of its profit after tax, on average, as dividends. However, wealth seekers have only had tales of disappointment for the stock. In the last five financial years, the stock gave a measly dividend-adjusted annualised return of 3 per cent.

However, the market has recently witnessed a transformation of this anti-hero into a hero of wealth creation. It has nearly doubled in value in the past 12 months, pushing its dividend-adjusted five-year annualised return to 26 per cent.

Its financial performance has run in tandem with the soaring share price. In the last 12 months, it has clocked record-high revenue and profit after tax.

This transformation has the entirety of D-street intrigued, including us. So let's dive into details of how this beloved of dividend seekers became a wealth creator.

Higher production on the horizon

Coal is a commodity, and like all commodities, it is cyclical. However, unlike other commodities, the demand for coal remains stable. Also, India is a coal-deficit nation, meaning demand is unlikely to dry out. So, the key to thriving in the coal industry is increasing production.

Coal India undertook various initiatives to improve production starting FY19. It invested in emerging mining tech, including continuous miners and heavy earth moving machinery (HEMM), to amp up production volume. In addition, it also commissioned several new mines.

In FY23, Coal India met its production target for the first time in over a decade. Investors are optimistic that production will continue to climb up in the coming years.

Cheaper transportation

Transportation costs can be a make-or-break factor in coal mining. Coal India's first-mile connectivity (FMC) program is expected to reduce transportation costs significantly in the coming few years. Under the FMC initiative, Coal India will construct mechanised conveyors to carry coal from mines directly to railway wagons, eliminating road transportation in mining areas. In recent years, it has invested considerably in setting up railway tracks close to mining areas.

The management plans to achieve around 915 MTPA mechanised coal evacuation by FY29. It has already commissioned the project with a capacity of 764 MTPA; the project's first line should be operational from FY25 at a relatively lower capacity of 92 MTPA.

Is the euphoria justified?

The resurgence in its finances underscores that the management is targeting growth and not just sustenance. Its recent capex also highlights the company actively seeking reinvestment avenues. Thus, the market's reaction is not pure hysteria.

However, there are risks that should not be ignored.

First, renewable energy is a growing threat. The Indian government is aiming to slowly phase-out coal from its energy basket, and hence, the future of coal companies is shrouded in uncertainties. However, coal accounts for nearly 70 per cent of the nation's power. It would be near-impossible to phase-out coal in a single sweep. Coal India is also taking protective steps and gradually working towards including a renewable energy value chain.

Second, Coal India's past record works against it. While the recent performances have been commendable, it has a long history of inconsistent profits, stagnation and quality concerns. The management recently set a lofty target of hitting one billion MT of production by FY26.

But, Coal India has failed to meet targets before.

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