Coal India share up for re-rating

An overhang of investors’ concerns, some unfounded, has been keeping the stock of Coal India at levels below its potential, a section of the market believes.

Among them, at least one – disinvestment of shares by the government, which currently holds around 90% of the near-monopoly coal miner, being widely speculated to happen in the next financial year – might not materialise, making it an attractive investment bet, Barclays has said in a recent research report.

A buyback – the repurchase of outstanding shares by a company in order to reduce the number of shares on the market – coupled with a hike in coal prices, might revive investors’ sentiment, it says. “In our view, a potential stake sale by the government (up to 10%) has created concerns of a supply overhang,
leading to a sharp correction in the stock price.

We believe the government will consider other options like share buyback and large dividend payouts before finalising a follow-on public offer (FPO).

Expectations on the stock are very low and we believe any positive news flow such as a price hike, continued strength in volumes, a large dividend/buyback, etc, would lead to a rebound in the stock price,” Barclays adds. There is indeed a distinct possibility of a buyback instead of disinvestment of the shares happening.

Coal India, in fact, has amended its Article of Association this year and approval of its shareholders has already been received. A buyback of its shares paves a roundabout way for the government to raise money and meet its disinvestment target by taking a bite off the coal major’s bulging cash balances which finds little productive use.

The buyback proposal was approved by Coal India’s board in May and subsequently, in September, it got shareholders’ approval to amend the Articles of Association by including clause 18A to provide for the buyback. Apart from disinvestment of shares, Barclays has also allayed fears of negative impact of price pooling on Coal India’s profitability.

“While there is a lot of noise around price pooling, we believe the maximum quantity that CIL would need to import in FY15 would be restricted to 27 million tonnes, even if all the fuel supply agreements (FSAs) are signed immediately and assuming 80% of upcoming power capacity achieves full stabilisation,” the report adds.

Coal India, the report says further, is facing cost pressures, due primarily to multiple hikes in diesel prices and wages for contract workers, which can be partly offset through a likely 5% hike in prices.

“We believe CIL would need to increase prices by 4-5% to offset these cost pressures. Our interaction with the management suggests that CIL may be considering a price hike, although ascertaining the timing of the hike is difficult.”

@SumitMoitra