Missing production target impacts investor sentiment

For the first time, the country’s largest miner Coal India saw its stock close below the initial public offering price.

The Government-run company’s scrip closed at ₹243.60, down 1.12 per cent on the BSE on Wednesday. The stock was offered at ₹245 during the public issue, and retail investors bought it at a discounted price of ₹232.75 in November 2010.

Earlier, the stock had touched ₹238.35 during intraday trades on the BSE on August 30, 2013. However, it recovered and closed at ₹250.50.

Varied reasons

“The reason for drop in stock price is inexplicable. In the first nine months of the current fiscal, we have reported almost similar performance as in the previous year,” S Narsing Rao, Chairman and Managing Director of Coal India told Business Line.

According to analysts, the negative sentiments are for multiple reasons. These include the miner missing its production targets, increased obligations of fuel supply agreement and Government’s move to open up the sector to increased domestic private participation.

The miner is expected to miss the production target of 482 million tonnes for the current financial year by around 5 mt. Earlier, the Government also proposed to sell shares of Coal India to garner more than ₹10,000 crore to meet its disinvestment target.

However, strong opposition from Coal India’s workers and fear of not getting adequate response to the share sale saw the Government settle for a special dividend. Coal India announced its highest-ever special dividend of ₹18,317.46 crore for 2013-14. Of this, the Government received a hefty ₹16,485 crore. It also received an additional ₹3,100 crore as dividend distribution tax.

Coal India Chairman Rao said “there has been a demand from investors to offer higher dividends, as we have good cash reserve.” Investors must be happy after getting the special dividend, he added.

Analyst calls

“We downgrade Coal India to ‘hold’ with a reduced target price of ₹280. We are disappointed by the lacklustre operational performance of CIL due to volume miss,” Centrum Equity Research said in its report.

It also said e-auction realisations have stayed subdued. In the third quarter, the e-auction coal volumes were at 15.1 mt (up 44 per cent year-on-year) but with realisations at ₹2,232 a tonne, which is down 24 per cent compared with the same period last year.

Going forward, all eyes will be on the manner in which the new Government that would take charge in May, treats Coal India. The current UPA-led Government has not opened up the sector to global players.

“Any big-bang entry by private miners could be negative for Coal India in terms of maintaining margins. However, any such move is difficult since coal is still a State monopoly,” said Karvy Stock Broking.

But, all is not bad for the miner. Morningstar Equity expects Coal India to maintain a strong balance sheet with a robust free cash flow sufficient to fulfil capital expenditure and maintain high dividend payouts for the foreseeable future.

“Our fair value estimate is ₹340 a share. This implies a dividend yield of 6 per cent and 12.4 times 2015 adjusted earnings,” it said in its report.

(This article was published on February 26, 2014)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.