Coal India: Prospects improve on pricing

With the regulatory Bill not intending to change its autonomy in this regard, analysts are positive

Coal India's stock got a boost after a Cabinet committee approved the Coal Regulatory Bill. In two trading sessions, the stock gained about six per cent, before losing some ground on Tuesday as the June quarter volume numbers disappointed the Street. Though the production and offtake run-rate is likely to remain soft in the near term due to early onset of the monsoon, analysts expect Coal India (CIL) to later make up for the lost volumes.

Further, with expansion clearances gaining momentum, analysts at Morgan Stanley see the production growth getting healthier in the second half of FY14.

Apart from volumes, as CIL will retain pricing power even after a regulator is appointed, plus the price rises in May-end, it should bode well for profitability. Thus, a majority of analysts remain positive on the stock, with a consensus price target of Rs 376 (current price Rs 300), shows Bloomberg data. The stake sale by the government, however, might keep a check on stock prices in the interim.

Regulatory Bill
The Cabinet on Friday cleared the Coal Regulatory Bill, wherein the regulator's role will be to set frameworks for pricing (raw and washed coal), attract investment in mining, help resolve disputes and advise on policy issues. CIL would, however, retain its price-fixing authority. This has allayed investor fears on this count and has rubbed off positively on the stock.

The fact that the company was able to raise prices for its FSAs (fuel supply agreements) in May-end (after some years) has also provided big relief. The company had not been able to raise prices for a while, despite an increase in employee pay. Analysts at Morgan Stanley say this should raise investor confidence in CIL's ongoing ability to lift prices. The brokerage estimates Coal India's average realisations to rise by 5.3 per cent in FY14 and 6.4 per cent in FY15.

Volumes
After the company's offtake touched 465 million tonnes (mt) in FY13, it plans to dispatch 492 mt in FY14. However, the June quarter numbers have come as a disappointment. The company achieved 102.9 mt production against a target of 106.9 mt; offtake at 115.25 mt also lagged the target of 120.8 mt. Analysts at Religare say with commissioning of three key railway lines for CIL likely to get delayed and lower rake availability, they expect the company to lag its medium-term target of growth.

Things could, however, improve. Abhisar Jain at Centrum Broking feels the company can make up for the lost run-rate later. For now, Jain maintains his estimates of 485 mt during FY14 and would wait for inputs from the management to revisit his estimates.

 

Nevertheless, on the back of some improvement in the clearance process for some expansions, analysts at Morgan Stanley expect the growth rate to catch up in the second half of FY14. They estimate a compounded annual growth rate (CAGR) in output of 6.8 per cent during FY13-16.

Valuations
Though the Street might be discounting for the share sale by the government, analysts at Kotak Institutional Equities note the original issue price (Rs 245 a share), plus incremental cash balance (Rs 65 a share), is also higher than the current market price of Rs 300, setting a possible base-minimum price for any incremental share sale, given the 19 per cent CAGR in earnings. While Kotak has a target price of Rs 410, analysts at Morgan Stanley have one of Rs 413 and Jain at Centrum has Rs 375.