Coal India Ltd's (CIL) stock has gained in the recent past. Though lower than its Rs 415 high in May, it still is significantly overvalued due to the market's exuberance over speculated reforms in the coal sector as well as anticipation of a restructuring of the company.
News reports also state that at the next board meeting the issue of a price hike in the commodity will be debated. Our analyst Piyush Jain Coal looked at the company's latest results. Freight expenses rose 18% versus the prior year with CIL unable to pass on the increase in costs entirely to its end customers. The company had taken price-adjustment measures in the first and third quarters of fiscal 2014 and he expects similar action in first quarter fiscal 2015. This would complement his thesis that CIL can increase prices with cost adjustments.
The company's net profit after tax of Rs 151 billion for FY14 was slightly below Piyush's expectation of Rs 157 billion.Operating income fell 9% and operating margins fell from 30% to 26%. Lower e-auction volumes and increased freight and other mining costs drove the poorer result. Piyush is not unduly concerned with the current fall in profitability.He is adopting a wait-and-watch stance to see how the new policy for the coal and power sector shape up.
A couple of months ago, in an interview with The Economic Times, BJP Treasurer Piyush Goyal was asked how the BJP would resolve the issue of the country importing coal despite sitting on the one of the largest coal reserves in the world. He stated that CIL has not been efficiently managed and corruption has taken its toll. "Despite having plenty of coal reserves we have a problem. Also a large part of these reserves are allocated without due process. Because of this, mining is stalled in large parts of the country. Coal India which should have mined significantly more than what they are doing now is not meeting their targets. Huge corruption exists in the distribution of Coal India's coal and you have some power producers who say we have no problem because we can manage the environment in Coal India and we have other power producers who can never get coal even after the linkages are given to them."
His solution was simple - a clear message from the top right down the line stating a zero tolerance for corruption.
CIL is one of the world's largest coal-producing companies. Our analyst believes that it offers investors high-quality exposure to a low-cost miner with a dominant share of coal supply in the Indian market. He expects CIL to maintain a strong balance sheet with robust free cash flow sufficient to fulfill capital commitments and maintain high dividend payouts for the foreseeable future.
To read Piyush Jain's analysis of Coal India Ltd, click here.
