The valuation of Gujarat NRE Coke Ltd (GNCL) has dropped by nearly 10% in two trading sessions, despite an announcement by the company earlier this week that it plans to increase the production capacity of its Australian mines to 6 million tonnes (mt) by fiscal year 2012-13. The mines are expected to produce 1mt of coking coal this fiscal year.
The company has said it will invest between $400-450 million (Rs1,776-1,998 crore) on these mines, adding that demand in India for coking coal from the steel industry continues to grow at a phenomenal rate.
Shares of rival firm Austral Coke and Projects Ltd also fell by about 10% on Friday, after an impressive debut the previous day. On Thursday, Austral’s shares had listed at a 15% premium to its IPO price of Rs196.
The weakness in these firms’ shares can be attributed to concerns about a drop in prices of coke and coking coal.
One of the world’s biggest coal producers, US-based Massey Energy Co., negatively surprised the Street by warning investors that average prices and production may be lower than expected this year. According to an analyst report, the lukewarm guidance could be because of lower shipments of metallurgical coke, which is what GNCL’s Australian mines produce.
GNCL’s shares have now nearly halved from the highs it reached earlier this year. At current levels, they trade at a valuation of just seven times estimated earnings for the year till March. This is based on estimates by Macquarie Research, one of the few brokerages that track the firm. The valuation multiple isn’t very different using annualized consolidated earnings for the June quarter. While comparable numbers are not available on a consolidated basis, stand-alone profit before tax jumped by more than 125% thanks to soaring coke prices.
The concern now is how long coke and coking coal prices may remain firm, especially given the likelihood that a slowdown in the global economy may result in a drop in demand from the steel industry. But note that while Massey Energy provided a lukewarm guidance, industry giant Peabody Energy told investors gathered at a Lehman Brothers conference on Thursday that world coal demand continues to exceed supply and prices remain strong and are rising. But that hasn’t stopped the firm’s shares from dropping by more than 20% in the past week, almost in line with the fall in Massey’s shares.
The sell-off in shares of coal companies both in the US and Indian markets suggests that investors are preferring to play it safe rather than be sorry.
A new method to compute bank efficiency
The Reserve Bank of India’s latest report on currency and finance arrives at the rather startling conclusion that the State Bank of India group performed better than foreign banks as well as so-called new private sector banks in 2006-07 on all efficiency yardsticks—cost, technical and allocative. Both the State Bank group and other nationalized banks were more efficient than foreign banks. The central bank used a technique called data envelopment analysis to arrive at these counter-intuitive conclusions.
More traditional measures of efficiency, however, paint a different picture. For instance, the cost-to-income ratio of nationalized banks was 49.36% in 2006-07, that of the State Bank group 52.80%, new private banks 52.59% and foreign banks a low 44.64%. It’s interesting to note how the cost-to-income ratio of the new private sector banks has deteriorated significantly in recent years.
Perhaps, most importantly, return on assets was 1.65% for foreign banks, far above 0.92% for new private banks, 0.83% for nationalized banks and 0.82% for the State Bank group.
Companies depending more on retained profits for funding
Among the many tables tucked away in the Reserve Bank of India’s report on currency and finance is one that shows how the source of funds for Indian firms has changed over the years. Interestingly, the data shows that internal sources of funds, which means retained profits, have become increasingly important. While internal sources accounted for 31.3% of the total funding needs of Indian corporate entities in the 1992-97 period, that share went up to 56.1% in 2001-06.
Looking Within (Graphic)
One would have expected that with the development of the country’s capital markets and with the opening up of the economy, companies would increase their share of funding from outside sources. But that doesn’t seem to have happened. Instead, the share of equity in corporate funding has declined from 20.6% during 1992-97 to 10.9% during 2001-06. Borrowing from banks has, however, increased.
Perhaps, the picture will change once the data for the period 2006-2008 is available, as companies greatly increased their reliance on external commercial borrowings, and as domestic credit growth increases. Nevertheless, the fact that companies are relying more on internal sources could be a sign of prudent financial management and could cushion balance sheets during the current downturn.
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