Bet on Tata Steel; sell CIL, accumulate NMDC: Angel Broking

Below is the verbatim transcript of his interview on CNBC-TV18

Q: A word on the quantum of the dividend and how are you placed on Coal India now?

A: This is one-time dividend of Rs 29 which will result in an outgo of close to Rs 21,500 crore including dividend tax. So if you look at Coal India's balance sheet it had close to Rs 64,000 crore of cash at the end of September and the balance sheet structure was not that efficient.

Meanwhile, since its capex requirements are close to only Rs 3,000-5,000 crore annually, so it makes sense that either you make a huge capex out of Rs 64,000 crore or payout as a dividend. So, I believe this is a very good move and it is a minority shareholder friendly move of paying a Rs 29 dividend. Moreover it also generates Rs 16,000-18,000 crore of operating cash flows and apart from that there is other income of close to Rs 7,000-8,000 crore. So overall it is a very good move as far as minority shareholders are concerned.

Q: How does it leave an investor hereon? Monies set aside for expansion are slowly getting whittled away because the government will take a fair share of dividend. The dividend has been higher than in past years. There will be an overhang of divestment in future governments as well. So how do you view the stock for a longer term investor?

A: From a longer term perspective we do not like the stock. If you see Coal India's volume growth - it has been only 5 percent at max, that too if weather is fine and so going forward we do not expect more than 5 percent volume growth.

Secondly, on the price hike front, just a month before Coal India had taken a price hike and four months earlier it had taken one price hike across the board. So, moving forward we do not expect incremental price hikes hereon, because given the precarious situation of SEBs it will be very difficult for Coal India to raise prices.

Apart from that if you see e-auction prices have remained flat and e-auction volumes are going down as Coal India will cannibalise incremental sales towards power purchase agreement (PPA). So we do not see an incremental EPS accretion going forward. So we believe we do not like the stock and we recommend investors to get out of the stock.

Q: How would you approach National Mineral Development Corporation (NMDC)?

A: We like NMDC because it is one of the most inexpensive stocks, a very low-cost producer of iron ore. Apart from that its volume growth is expected to be much better than Coal India. Over the next two years we expect a volume growth of close to 10 percent, so that is decent. There could also be a special dividend but we are not speculating on what the quantum of dividend could be, but it has Rs 22,000 crore of cash, so it can go Coal India way where there will be a special dividend.

Fundamentally as well, even if one does not consider any dividends it still is a good stock and we have an accumulate rating as of now.

Q: Since we are into metal stocks discussion what is the view on the other two metal stocks in the steel space at least - let us begin with Tata Steel and then JSW Steel?

A: We like Tata Steel. Basically what we have seen over the last three quarters European operations have done very well. They have beaten street expectations. Its Indian operations also continue to do well. Despite very slow demand in India its domestic volumes have surprised us. It has managed to sell higher volumes. It had expanded its Jamshedpur facility by 50 percent and going forward we believe that earnings stability in Europe and earnings growth from India operations is likely to take stock at higher levels.