Coal India investors’ long wait for special dividend

At first glance, the fall in Coal India Ltd’s (CIL’s) share price after the company decided to raise non-coking coal prices at one of its subsidiaries is surprising. The company’s board also approved a proposal to increase loading charges. Together, both the steps are expected to generate additional revenue of Rs.337 crore in the current fiscal year.

What’s more, the price hikes and higher charges, on an annualized basis, can increase CIL’s profits by as much as 5%, Citigroup Global Markets Inc said in a note. Still, as the 3% fall in the stock price suggests, investors are not enthused. There are two reasons for this.

One is that investors had already discounted such a price hike. Post some price increases in May, several brokerages, including Citi, expected the company to revise prices at leftover subsidiaries and product categories. In fact, some have taken the price hikes for granted and included that in their revenue estimates. IndiaNivesh Securities Pvt. Ltd, for instance, said in a note, “Overall increase according to CIL is 4.77%. (It is) likely to improve revenues by Rs.22 billion annually, which we have already included in our model.”

Second, and the most important reason why the stock plunged, is the lack of decision on a special dividend. Despite repeated misses on production targets, most analysts retained their favourable outlook on CIL owing to low valuations, healthy cash flows, less capital expenditure and high dividends. Considering the government’s need for money and CIL’s comfortable cash levels, analysts were expecting the company to declare a special dividend during the current fiscal.

“We believe paying a special dividend could be the preferred option, given Coal India Ltd generates free cash flow of about Rs.200 billion/year and its annual capex is limited to Rs.30-40 billion. Even if we were to assume a further Rs.100 billion of capex on railway infrastructure over the next five years, we estimate the company could comfortably pay a special DPS (dividend per share) this fiscal year of Rs.14-15, as it has cash of over Rs.600 billion,” said Daiwa Capital Markets India Pvt. Ltd.

Daiwa Capital Markets is not alone in expecting a special dividend. Citi Research, UBS Securities India Pvt. Ltd and a host of local brokerage houses were eagerly waiting for the company to declare a special dividend. Depending on the brokerage house, the dividend expectations were between Rs.14-20 per share, which translates to 5-7% of the current share price. The board in its meeting on Monday has already ruled out a share buyback and has deferred the decision on dividend to February. That delay is hurting the stock.