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Breaking up Coal India will raise availability: Centrum

With reports suggesting that prime ministerial designate Narendra Modi is planning to break up giant public sector unit Coal India to push output and curb imports, Abhisar Jain of Centrum Broking believes the move will be healthy for the sector. Coal India has consistently failed to meet its output targets for years now. The breaking up of the company is intended to raise local coal availability, believes Jain. The coal sector has been grappling with production issues and allocation scams, among others. Coal is the cheapest form of energy and is used for generating more than half the power in the country.

Jain has a ‘hold’ on Coal India with a target at Rs 310 per share. He sees limited upside to Coal India and says the stock appears expensive at current levels.

Below is the verbatim transcript of Abhisar Jain's interview with CNBC-TV18:

Q: Is all this pointing out definitely to going long on Coal India or can some steps like actually permitting private sector competition be negative for Coal India?

A: Yes actually the reports that are coming out is about a possible breakup of Coal India. As we know Coal India comprises of 7-8 subsidiaries that are quite big in themselves. So if you compare to global peers the next biggest coal major will be half of the output of Coal India. And some of these individual subsidiaries will be almost 40-50 percent size of those bigger guys globally. So they are talking about a breakup and each subsidiary then planning its growth path in a better way which might be good for the sector and for coal output as Coal India on a whole has been struggling to even give 5-6 percent volume growth on a consistent basis. So in that sense we view it as a positive. It is difficult to say what kind of value could accrue in this breakup and how will it be taken up. But yes in terms of your question on private competition coming in, I don't see having a very negative impact per se from the point that the coal production in the country goes up and the import goes down. So in that sense I don't see how it can be too negative for Coal India specifically.

Q: How are you approaching the stock now because for a major part of last year Coal India was in a very tight range between Rs 250-300? It is only in the last three-four months that it has broken out of the range. What is your call on Coal India?

A: We have been as such positive on the stock but post the dividend dripping wherein they had given huge dividend, and there was limited upside from Rs 300 to Rs 330 levels we had been having a hold rating with a 310 kind of a target price. Now post the very sharp uptick in the stock price we see the stock currently trading at expensive valuations. On my forward estimates it is trading at almost nine times EV/EBITDA on FY15 and almost 14.5-15 P/E. Now to come to the volume and pricing fundamentals basically Coal India has disappointed in FY14, they have missed their volume guidance for almost 20 million tonnes, they have reduced the volume guidance for FY15. There has been disappointment in terms of realizations because there has been a stricter grade compliance which has come into the picture which has reduced the raw FSA coal realizations. So from that point of view I see limited upside from current levels even if I were to factor in a rerating multiple from my estimates because the upsides in the numbers per se look limited. So until and unless a firm plan has been announced by the government on what they want to do with the breakup and things like that, it is difficult to see further upside from here on.

Source: Moneycontrol