Policy support for CIL is likely to be more forthcoming and is, in fact, already visible in enhanced support from the railways and a rise in the pace of environment clearances.
As many as 10 clearances have been received in the last few days. In our view, the market is under-appreciating both the potential of a volume rebound and CILs ability to control costs.
We reiterate our overweight rating for the company with a price target of R 411 a share.
Market fears of CIL supplying imported coal at FSA prices and, thus, diluting margins, appear unwarranted, as the model fuel supply agreement commits the company only to volume and not price.
Recent comments from CMD-designate Narsing Rao that imported coal would not be subsidised should also allay some investor fears.
The recent presidential directive is not necessarily a negative for CIL as we expect it to be followed by higher policy support to clear bottlenecks.
CIL has taken up the matter of faster clearances with the ministry and sought its permission to produce 25% more than the existing capacity in 11 projects, of which clearances for 10 projects totalling 19 million tonne has been granted.
The railways also appear to be working on several productivity improvement measures to ease rake availability for CIL.
A higher dividend payout is the most logical option for the government to use CILs cash balance and investors, too, seem in its favour as it would be RoE accretive.
With a 7% FCF yield on FY13 earnings, we see CIL valuations as attractive; reforms and a potential increase in notified prices can provide a significant upside.