The news flow for Coal India over the last week has been a mixed one. While the news of Competition Commission of India slapping a Rs 1,773 crore has been a dampener, the company's decision to take a price hike is a positive. Analysts don’t see the fine as a setback as the company will contest the case and the penalty is only 3 per cent of the company’s cash reserves. Even if the company has to pay the penalty the impact is estimated at Rs 3 per share.
The hiking of non-coking coal price from its western coal fields holds significance. The coal field produces 44-45 Million ton (MT) or about 8 per cent of the company’s coal produce. With the notification of 10 per cent hike the company has also increased its rapid loading charges along with the non-coking coal sizing charges in a range of 15-60 percent depending on sizes. With this the company expects to earn incremental revenues of Rs 197 crore during FY14. On an annualized basis analysts at Prabhudas Lilladher expect Rs 1,200 crore incremental revenues or Rs 23 a ton rise in prices.
Abhisar Jain at Centrum Broking expects the decision to boost Earnings before Interest tax Depreciation and Amortisation (EBIDTA) by Rs 10-15 a ton. He sees the blended realisations to improve by 2 per cent from these measures.
Investors remain cautious
While the price hike bodes well the Street will be looking at the performance by the company in coming quarters. The caution is due to weak realisations seen during September quarter despite the company taking price hikes of 5-6 per cent in the month of May 2013 for coal supplied under Fuel Supply Agreement (FSA). Also company’s coal dispatches of 109 million tonnes (MT) during the September’13 quarter were 7.3 per cent higher on a year-on-year basis.
Analysts, however, had attributed the same to the lower grade of inventory liquidated by the company which led to dip in realisations. Furthe due to FSA commitments, coal supply to power projects was sharply higher whereas off-take to non-power customers (particularly cement, sponge iron projects that yield much higher realisations) was lower. Further the e-auction prices were also lower due to weak international prices and lower industrial activity.
Profitability, dividend and valuations
Nevertheless, analysts expect the second half to be better for the company. Analysts at Prabhudas Lilladher expect CIL’s e-auction volumes to grow 50-55 percent year-on-year in December’13 quarter which would more than offset the 25 per cent fall in realisations and should put rest the Street’s concern on volumes and earnings in e-auction.
Over the longer term though volumes will increase and better realisations bode well nevertheless on the flip side, analysts expect benefits of FSA incentives not accruing to the company from FY15. Jain observes that with the New FSA’s of 71 Gigawattss being signed, he has removed the benefit of FSA incentives completely from FY15E. While he maintains volumes of 484MT and 508 MT in FY14 and FY15 respectively he has revised EBITDA for FY14E and 15E upwards by 2.1 per cent and 4.2 percent respectively.
Reports suggest that the company also has pushed the special dividend decision to February 2014 while the government may not go for divestment of sale in light of protest by workers. This if happens will remove a major over hang on the stock, while the expected dividend, pegged at Rs 25-30 will be good for the Investors. Out of 16 analysts polled in December 2013, 10 have buy ratings, 5 hold ratings and one sell with a consensus target price of Rs 328 as per Bloomberg. The stock is trading at Rs 284.90.