Moneycontrol Bureau
Shares of Coal India gained nearly 4 percent intraday Tuesday, hoping coal price hikes for non-power consumers.
CLSA maintains buy on the stock with a target price of Rs 435 apiece as the brokerage sees a decent possibility of a large price hike for non-power consumers in FY16, which would be a catalyst for the stock.
Coal India has not taken a price hike since May-13 and has seen earnings decline for two successive years.
The brokerage believes that the aggressive bids in the coal mine auctions by non-power companies has created a case for a sharp hike in Coal India’s fuel supply agreement (FSA) prices for non-power customers.
Most of the winning bids in the recent coal mine auctions in the non-power segment have happened at around 80 percent of the landed price of imported coal on grade adjusted basis, which implies around 30 percent premium to the landed FSA coal price for non-power consumers.
Most companies have placed fairly aggressive bids in the auctions to secure at least part of their coal supply and protect their cost structure from any potential spike in global coal prices in coming years.
Currently, FSA price for non-power customers is 30 percent higher than for power customers but is still at around 40 percent discount to landed imports.
In fact, the Coal Ministry is already contemplating a possible auction of Coal India’s old FSAs, says CLSA in its note.
Given the government’s preference for keeping power tariffs under control, Coal India might choose to keep power FSA prices unchanged and only hike non-power FSA prices, it adds.
According to analysis of the CLSA, Coal India can theoretically hike non-power FSA price by up to Rs 700-800 per tonne (around 45-50 percent) to bring it in-line with auction bids.
“This would result in around 6 percent increase in Coal India’s blended average selling prices (ASPs) and around 16 percent upside to FY16 EPS estimates. Improving production growth and potential for price increases should drive a recovery in Coal India’s earnings growth after 2 years of EPS decline,” says the report.
At 15:02 hours IST, the scrip of Coal India was quoting at Rs 370.40, up Rs 13.45, or 3.77 percent on the BSE.
Posted by Sunil Shankar Matkar
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