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Coal India rallies 8%, hits 52-week high on reports that new government exploring FDI in coal sector

Coal India rallied as much as 8.22%, on reports that the newly elected PM designate Narendra Modi is exploring to break up the state behemoth.

ET Online|
Updated: May 22, 2014, 04.55 PM IST
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Coal India rallied as much as 7.7%, on reports that the newly elected PM designate Narendra Modi is exploring to break up the state behemoth.
Coal India rallied as much as 7.7%, on reports that the newly elected PM designate Narendra Modi is exploring to break up the state behemoth.
NEW DELHI: Coal India Ltd rallied as much as 8.22 per cent in intraday trade on Thursday, on reports that the newly elected PM designate Narendra Modi is exploring to break up the state behemoth and is also planning to open up the sector to foreign investment.

The stock hit a low of Rs 378.20 and a 52-week high of Rs 401 in trade today.

According to media reports, Modi wants to fix the coal sector quickly to ensure unbroken electricity supply across the country. Coal generates more than half of India's power and is the cheapest form of energy.

The new government should put special focus on coal/power sector as this remains core to India's growth revival, say analysts. The new regime can fast track coal development, address the issues around the captive coal blocks, domestic coal linkages, which will boost the sector.

"One of the thing that I can see - what a stable government can do is essentially try and restore coal supplies back which essentially means ramp up coal production, improve evacuation infrastructure, etc.," said Murtuza Arsiwalla, Power Analyst, Kotak in an interview with ET Now.

"None of which is an easy haul, I mean all of it is a more medium to long term objective which is out there. Looking back lot of the private sector players with huge aspiration set up capacities mostly based on domestic coal linkages, but I have been starved for fuel," he added.

As per a Reuters report any reform will begin with Coal India, as it accounts for 80 per cent of India's total coal output, said a source at Modi's Bharatiya Janata Party (BJP). The world's largest coal mining company has failed to meet its output targets for years.

Coal India enjoys a premium valuation to its peers due to its monopolistic position, higher RoE at 36 per cent, and 'utility-like' business model.

There is a possibility of converting various units of Coal India into independent companies, and making respective state governments equity holders to help speed up land acquisition and other such processes, Reuters reported quoting a top Coal India official.

Apart from using modern mining technologies to boost efficiencies and convert "challenging mines into modern mines", the government will also explore international private-sector partnership in a significant way, Reuters reported quoting a BJP source.

Analysts at Antique Broking expects a strong and capable Coal Minister to be appointed, with a mandate of achieving higher production targets. The single-party majority will help avoid 'coalition compulsions' and improve inter-ministerial coordination, which is important for a regulated company like Coal India to outperform.

"They have increased their target price to Rs 434 per share from Rs 351, and have assigned a FY16e EV/EBITDA of 8.5x from 6x earlier (historical average of 8.7x EV/EBITDA since its listing)," said the report.
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