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Business News/ Opinion / Online-views/  Where is Coal India’s stock heading?
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Where is Coal India’s stock heading?

Where is Coal India’s stock heading?

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Investors buying state-owned company stocks typically factor in the political risk that managements might not have complete independence in decision making. Yet, the expected pinch, when it comes, is painful like in the case of Coal India Ltd.

It’s a good time to be a coal miner, but not for the world’s largest producer of the commodity. Prices of thermal coal are hovering around $140 (Rs 6,342) a tonne, the highest in two years, helped by the floods in Queensland, Australia.

Also See Facing Headwinds (PDF)

But Coal India’s hands are shackled under various government laws and its fuel supply agreements, which allow only two limited price hikes a year. Despite coal prices being freed up a decade ago, Coal India has increased prices at a measly annual average of 4.9%.

But that is only one part of the story. Coal India does not seem to be in a position to take advantage of booming local demand that is expected to increase by 50% over the next five years. Last month, the company said it would be unable to meet its production target for this fiscal by 3.5% and the next year by 8% due to environmental issues. Moreover, inventories are piling up as the company can’t find enough railway rakes to transport what it has already mined.

Now, the seemingly unthinkable has happened. A brokerage, RBS Securities India Ltd, has recommended selling Coal India shares, the second to do so among the 24 firms covering the company.

“Domestic production has been constrained by a stringent environmental regulation, lengthy approval process and difficulties in land acquisition," the brokerage note said. It expects Coal India’s output to grow only 3.5% a year in the next four years.

Consequently, notwithstanding the company’s assurances that dispatches will be met from inventories, the brokerage expects Coal India’s earnings to grow at some 4.2% this fiscal, which is some 11% less than the consensus estimate. This is provided shaky state electricity boards scrap together enough to pay bills. That’s also assuming that profit sharing tax proposed in the draft mining bill doesn’t kick in.

These headwinds are somewhat reflected in the stock price. Four months ago, the stock was the toast of the town, India’s largest new share sale and the darling of investors. Now the buzz about the stock seems to have disappeared.

After it closed at a dizzy 342 on debut day, the scrip has more or less tracked the benchmark Sensex index on the Bombay Stock Exchange, shedding some 9%. In Bloomberg’s global peer set of 51 companies, Coal India’s share performance is in the last quartile since the beginning of this year.

How the company tackles its production and pricing issues may well determine where the stock would head in the coming months.

Graphic by Ahmed Raza Khan/Mint

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Published: 16 Jan 2011, 09:39 PM IST
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