Short Takes

Shelved issue cushions Coal India

The Coal India stock had an eventful week. The stock’s dip on Wednesday after the Rs 1,773 crore penalty imposed by the Competition Commission of India (CCI) was temporary. The stock was also aided later in the week by the news that the planned stake sale by the government is likely to be shelved. It finally ended 2 per cent lower over the week.

The penalty slapped on CIL works out to around 10 per cent of its FY13 profits. The market’s muted reaction despite this sizeable potential hit may be attributable to the changes already made by the company in its Fuel Supply Agreements (FSA).

These changes address some of the issues raised by the CCI. For instance, the new FSA replaces joint quality inspection of coal supplied with third party inspection. This should help reduce disputes and the risk of payments getting withheld due to quality issues.

As of September, Coal India has outstanding dues totalling over Rs 11,000 crore from over 40 firms. The company has signed the new FSAs with 157 power companies.

CIL has indicated that it will appeal against the CCI order in the Competition Appellate Tribunal.

The stock also found support by news that the planned offer-for-sale to divest 5 per cent government stake may not happen. Instead, buy-back of shares or a special divided may be used to return cash to shareholders. The proposed stake sale has been weighing on the stock for a few months and has also been a contentious issue with the labour unions.

There are other concerns though. For instance, the annual quantity to be supplied by Coal India has increased substantially with the new FSAs. The company has to supply 211 million tonnes (MT), over and above the 465 MT despatched in FY-13. The higher FSA allocation may cut into the profitable e-auction sales, especially given the company’s production concerns due to labour issues.

Thumbs down to Torrent-Elder deal

Torrent Pharma’s announcement on Friday to buy the domestic formulations business of Mumbai-based Elder Pharma seems to have upset the market. While the Torrent stock lost 4.3 per cent, Elder Pharma slipped 8.8 per cent.

The Rs 2,000 crore deal will see Torrent acquire 30 brands of Elder and the associated marketing workforce.

For Elder Pharma, debt repayment using the proceeds will help reduce interest burden.

But concerns over the weak prospects of its residual business dampened sentiment and weighed down on the stock.

Investors of Torrent Pharma seemed concerned over the company’s decision to fund the acquisition partly through debt. Further, given the over-the-counter nature of the acquired brands, the receivable days may be in excess of six months. This may increase the working capital requirement for Torrent Pharma, and result in higher interest outgo.

Improving the receivable days significantly may be difficult in the near term, given the nature of the business. Efficient management of working capital will be critical to Torrent’s performance.

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