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Coal India: To e-auction or not?

Government suggestion to cut e-auction volumes could affect Coal India’s profits...

Coal India Ltd is caught in an existentialist dilemma: does it supply the fuel at whatever cost to Indian companies or does it maximize profits at a time of scarcity, thus benefiting its shareholders? If it had been a private firm, the answer would have been clear. The government suggestion to cut its e-auction volumes could affect profits.

This category, while accounting for about one-tenth of its sales volume, contributes almost 40% of earnings before interest and tax. After some back and forth, Coal India has agreed to lower its e-auction volume to 35 million tonnes (mt), or about 7% of its projected sales this fiscal, compared with 58 mt in 2014-15.

According to UBS Securities Ltd, this could result in a 6% reduction in earnings per share for this fiscal. However, there are a set of compensating factors at play here. For one, the scarcity in the fuel means realizations from e-auctions could well be higher here on. Secondly, there is a chance that the government may notify higher prices for regular (under fuel-supply agreements) coal.

There is a good likelihood that this could happen now that it has announced a share sale. To offload a 10% stake in Coal India—which might account for more than half its disinvestment income—the government will have to offer some incentives to share buyers. That’s also because profits cannot come from any significant increase in revenue. So far this fiscal, growth in Coal India’s production is 5.1% and 3.4% in sales.

These are pale shadows of a lofty 10% growth target. Even if production were to suddenly increase, how will they transport the coal to customers? This is a structural problem, and even the best of efforts will take a couple of years to fructify. The disinvestment also throws a new factor into play—disgruntled workers going on strike, affecting production. While Coal India will certainly benefit from being a monopoly in the longer term, these factors will have an impact on the stock in the near term. Some of these concerns are already reflected. The company’s shares have fallen 11% from their early June highs, compared with a 6% rise in the Sensex.

Source: www.livemint.com