Coal India shares rally on first price hike in two years, strong quarterly earnings

Written by fe Bureau | Mumbai | Updated: Jun 6 2013, 22:24pm hrs
Coal India Limited chairman SCoal India Limited chairman S. Narsing Rao (PTI)
Coal India (CIL) shares opened Tuesday's trade with gains of nearly 5% its strongest opening gains in nearly two-and-a-half years after the company announced an increase in prices for the first time in two years. While the stock gave up some of its gains, it closed at a three-month high of R322.95.

Tuesdays gain was of 3%, which added to the 1% gain of Monday. While part of the upside was driven by a better-than-expected 35% increase in the net profit announced by Coal India on Monday, it was the 4% price hike that led many analysts to turn optimistic on the stock as it would help neutralise the effect of the increased mining cost and lower e-auction prices.


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The decision of a price hike could trigger up to a 10% upgrade in the consensus earnings estimate for CIL for the current fiscal, said Rakesh Arora, MD & head of research with Macquarie Capital Securities. On Tuesday, Deutsche upgraded the stock to buy from hold and raised the 12-month target price to R360 from R345.

The market was also enthused by CILs recent decision to increase the dividend payout ratio to about 50% by announcing a dividend of Rs 14 per share at a time when CIL is sitting on a large cash-pile of R62,236 crore. However, analysts believe that a stated dividend policy rather than a one-off increase would give greater clarity to investors.

JPMorgan, in a recent note, highlighted that it is only in the last two years that CIL has raised dividends sharply. A stated higher dividend payout policy would likely result in multiple re-rating for the company, the report said.

While the stock gained for a second day, pending issues, including the planned 10% divestment in CIL and the dispute with state-run NTPC over the quality of coal, will be crucial in determining the stock's performance in the coming days.

Nomura, in a post-result note, pointed out that CIL's 2012-13 receivables witnessed a sharp uptick towards R10,500 crore, largely on the back of payments withheld by NTPC and few other state-owned power generation companies due to coal quality issues.

Besides these precise concerns, the stake sale itself has acted as an overhang on the stock, given the dismal post-OFS performance of PSU stocks like NMDC, Nalco and SAIL, said an analyst.

Recently, in a letter addressed to the Prime Minister, labour unions, representing more than 3 lakh employees of Coal India, threatened to go on an indefinite strike if the government proceeds with the additional divestment. The stake sale could rake in R20,000 crore for the government.

Even after the recent run-up in prices, the Coal India shares have widely underperformed the market in 2013. The stock has fallen 9% in the calendar year so far against a 3.5% gain on the 50-share Nifty in the period.