More trouble for Coal India

Investors worried about the possible diversion of spot sale to the power sector.

In the last two weeks, shareholders of Coal India Ltd (CIL) have had to grapple with negative news — first it was when the Cabinet cleared the draft Mining Bill, where companies would have to share 26 per cent profits with locals; then it was the workers’ strike; and now the possible diversion of spot market or e-auction sale of coal to the power sector.

The coal ministry is said to have agreed to the power ministry’s demand to divert a part of the coal currently being sold through e-auction to the power sector. This could come as setback for Coal India, which produced 431 million tonnes of coal last year. Of the total produce, 10-12 per cent has to be sold through the e-auction route. The CIL stock fell two per cent on the Bombay Stock Exchange. The reason: In case of the spot market sale of coal, the company makes an additional realisation of about Rs 800-900 per tonne, compared to linkage-based coal sale realisation of Rs 1,100-1,200 per tonne.

The company has been able to make better blended realisations and operating margins due to this additional revenue. But, if the new proposal is implemented and the company is directed to sell coal at lower rates, this additional profit would be significantly hit. Analysts believe that the contribution from the e-auction sale to the company’s total net profit is 25-30 per cent, which could, in the worst-case scenario, get wiped.

Analysts expect the company to report an EPS (earnings per share) of Rs 28 in FY13. That will be reduced by Rs 7-8 in case this new proposal comes, and will lead to further correction in its share price. Though the scenario at present is not clear, analysts believe that CIL may not get affected if it is allowed to sell the coal at market-driven prices. Meanwhile, the pressure on its share price will continue till there is further clarity. With the workers’ strike for a higher bonus, the stock has corrected 11 per cent in the last month and, at the current price of Rs 337, it is trading at a reasonable 12 times. This valuation can be considered reasonable as long as the impact of diverting coal to the power sector remains limited.