Thursday, October 13, 2011

STOCK WATCH: COAL INDIA - BUY


The share price of Coal India has corrected more than 10% in the last few trading days, due to the following reasons:

  1. The clearance of draft mining bill by the cabinet.
  2. Threat of strike by employees for better pay and bonus.
  3. The decision of the coal ministry agreeing to the demand of power ministry to divert a portion of e-auction sale of coal to the power sector.

The consequences:

The draft bill envisages that the companies would have to share 26% of the profit with locals. This is applicable to all mining companies, including Coal India. Being the largest producer and reserve holder of coal, it would not be difficult for the company to adjust its pricing and maintain profitability. In the long run, what is good for the locals will be good to Coal India too. Growth in any sector / region should always be inclusive. This policy move of the government is in the right direction.

Coal India is one of the largest employer in the country, has successfully implemented many wage settlements in the past. The company reviews the coal prices regularly. They should have factored the possible wage increase and other demands of the workers in to it. Hence this may not have any impact on its earnings.

The company, in the e-auction, sales around 10% of its total productions, gets a premium of Rs 900 a tonne, compared to the regular sales. By diverting a portion to coal starved power sector, as agreed by respective ministries, its profitability to some extent may be hit. However Coal India may rework its coal prices for both e-auction and others, to maintain and improve its profitability. Coal India has almost monopoly power over production, pricing and supply of coal in India. Coal India’s prices are cheaper by 30-35% compared to international prices.

At Rs 335 the share is trading around 10 PE of its FY 13 earnings, which is very attractive. Investors can accumulate at this level.

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