Coal India: Is it really a defensive stock?

Last Updated: Tue, Mar 19, 2013 04:50 hrs

Given the nature of its business, Coal India, the world's largest coal miner, is supposed to be a good defensive play. But the stock is down 21.3 per cent since September 2012, when the stock price touched Rs 386 a share. On Monday, the stock shed over five per cent, on news of the government readying plans to divest another 10 per cent in the company. Also, the analyst community is divided on the company's prospects, as too many variables can affect its performance. These raise questions on the stock's ability to maintain its defensive tag.

Given that the government is divesting its stake in companies at a discount to market prices, share prices of most public sector undertaking stocks have come under pressure. A 10 per cent divestment by the government in the company would create a supply deluge in the market, which has also put pressure on the stock. Coal India wouldn't have come under such pressure if the dividend payout had been higher for FY13. Nomura says the interim dividend of Rs 9.70 per share was below Street expectations and the implied dividend yield was three per cent. Analysts say the company has free cash to the tune of Rs 34,700 crore or Rs 55 per share and Coal India should identify a strategy to unlock value by using the free cash. However, a higher payout looks unlikely.

Analysts are split on valuations, too. While some believe after being beaten down, the stock is attractive, others like JP Morgan are underweight on the stock and have a December 2013 price target of Rs 320. The bull case is building in an earnings upgrade on price hikes, as costs have gone up. But, JP Morgan believes there are a few problems to this thesis. For one, large price hikes in the current economic condition would put further pressure on the power value chain. Given the global coal price decline, Coal India's ability to increase the differential between power and non-power coal sale prices (currently at 30 per cent) has reduced and a higher differential would likely force the non-power sector to look at imports.

It is also believed that falling global coal prices would impact e-auction realisations. However, analysts believe that though the company's e-auction volumes fell 5.3 per cent year-on-year in the first nine months, the average selling price (ASP) increased six per cent. And the third quarter's ASP is up 19.5 per cent sequentially. Positives like increase in production and dispatches by six to eight per cent in the last 10 months haven't been factored in.

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