This is the third increase in the year and CIL has now effectively taken an 8% price hike this year. Despite the markets pessimism, we find CIL in an excellent situation.
In a rising market, it benefits from improvement in 25% of its sales that are market-linked, while in a downturn, it is able to raise prices for the remaining 75% of its sales, which are to the power sector, to boost margins. We maintain outperform.
Improvement in domestic demand will lead to higher e-auction price and also allow CIL to recoup the losses on higher-grade coal. Both these factors could move FY15E up by 20%. We understand that CIL, being a holding company, will need a dividend declaration from subsidiaries to boost reserves before it can announce a special dividend.
We are expecting a 10% dividend yield this year including the possible special dividend with possible payout in Feb/Mar14. Coal India has been beaten out of shape due to possible follow-on public offer (now called off). It is trading at extremely attractive valuation of 13% FCF, 4.6x EV/Ebitda, which is 30% cheaper than global coal stocks.