Coal India Ltd chairman S. Narsing Rao will meet investors this week to stoke interest for a $1.6 billion share sale even as analysts slash their earnings estimates for the world’s biggest miner of the fuel.
A roadshow across Singapore, Hong Kong and the US will start on Monday as the government prepares to sell a 5% stake in the state-run company, Rao said. More than half of 50 brokerages including Jefferies Llc and Edelweiss Financial Services have cut their profit estimates for the year ending 31 March, according to data compiled by Bloomberg.
“Investors have many apprehensions,” Rao, who took charge of the state-owned miner in April last year, said in a telephone interview. “Concerns about our profitability are exaggerated.”
Coal India, whose initial share sale three years ago was oversubscribed 15 times, receded 32% from its May 2011 peak as rising labour and fuel costs eroded profit margins. A decade-low growth in India’s $1.8 trillion economy has damped demand for coal as factories run below capacity, threatening Prime Minister Manmohan Singh’s plan to raise Rs.40,000 crore from asset sales to narrow a budget gap and avert a ratings downgrade to junk.
“In the past three years, the market sentiment about emerging markets has become more pessimistic,” said Janne Rantanen, a fund manager at Helsinki-based FIM Asset Management, who oversees about $3 billion of assets. “That is hurting Coal India’s image as well.”
Shares gain
Coal India shares rose 0.8% to Rs.286.10 on 18 October. The stock has lost 19% this year, compared with a 7.5% gain for the benchmark BSE Sensex. The Kolkata-based company’s initial public offering (IPO) in October 2010, the nation’s biggest, raised Rs.15,200 crore, with the stock jumping 40% on debut.
The purpose of the roadshow is to mend investor sentiment hurt by frequent unrest among workers demanding wage increases and government directives to increase supplies to power plants, the lowest-paying customers, Rao said.
Shareholders are also looking at whether Coal India, which employs 358,000 workers, is able to find a better return on its $11 billion of cash in hand than interest that accounted for half of profit last year, he said.
“Coal India’s idle cash is weighing on its valuations,” said Ameerul Asyraf Bin Salman, an investment analyst at London- based Somerset Capital Management, which owns shares in the fuel producer. “The company has more workers than it requires. There’s scope for cost-cutting through automation.”
With Singh’s push for electricity generation, Coal India may have to divert sales to utilities, its lowest paying customers, after signing fuel-supply accords with power plants with 78,000 megawatts of capacity. Coal India, which sells about 10% of its output in electronic auctions to customers that do not have a contract, may sell more through auctions to improve profitability, Rao said.
“Nothing is cast in stone,” he said. “In case, we see a spurt in production costs, there is always scope to increase prices and bring them closer to the import price.”
Indonesian thermal coal bearing 6,322 kilo calories per kilogram was $76.61 a ton for October. Importers have to pay customs duty and freight over the benchmark price.
Spot sales of thermal coal fetched Coal India Rs.2,544 a tonne in the last fiscal year, almost double the amount paid by contract customers. Auctions, which made up 10% of volume sales, contributed about 40% to earnings before interest, tax, depreciation and amortization.
Waning coal demand at factories has pressured bid amounts at e-auctions, forcing the company to sell at lower prices in the last quarter. Auction prices dropped 16.4% to Rs.2,140 a tonne in the quarter ended 30 June.
“Things are certainly not as rosy as three years ago,” said Giriraj Daga, an analyst at Mumbai-based Nirmal Bang Equities Pvt., who has a hold rating on the stock. “With demand cooling, auction prices may surprise negatively.”
Power plants in the country had an average coal stock of 16 days as of 30 September, compared with an average of eight days a year ago, according to the power ministry. The number of plants with less than seven days of inventory, a critical level, came down to 18 from 35 a year ago.
Lower generation at power plants in the last six months has led to a rise in coal stockpiles, raising prospects of a decline in Coal India’s revenue. Sales at Coal India will grow 6% to Rs.72,360 crore in the year ending 31 March, the slowest pace in five years, according to the median estimate of 48 analysts in a Bloomberg survey.
Full-year profit may increase to Rs.17,460 crore, 52 analyst estimates show, from Rs.17,360 crore a year ago. The estimates ranged from a reduction of Rs.2,640 crore to an addition of Rs.2,780 crore. Profit in the three months ended 30 June fell 17% to Rs.3,730 crore, the first decline in at least five quarters.
India’s peak electricity deficit, which was more than 9% at the time of the IPO, has since reduced to 3.6%. Monthly power demand has contracted 2% to 82.9 billion kilowatt hours in the nine months to 30 September, compared with a 1.3% increase in the same period last year, according to the Central Electricity Authority.
The sale, which will reduce state ownership in Coal India to 85%, is half of an initial plan to sell a 10% stake. The government trimmed the offering after unions threatened to go on strike, saying stake sales are a step toward privatizing the company.
Coal India workers won a pay increase for five years starting July 2011 after threatening to go on a strike. They stopped work for a day in 2011, demanding a higher bonus. The company agreed to a 19% increase in bonus payout this year to win their support for the share sale.
Unions are pushing up employee costs and that needs to be compensated through higher prices, Rantanen said.
For Coal India, which fuels more than half of the nation’s power production, a price increase will probably be difficult to push through in the run up to the general elections due by May. An increase in prices of the fuel will lead to a rise in electricity bills for homes and factories.
“There would be room for worry if there was no leverage,” Rao said. “We have enough leverage to protect our profitability.”
Source:- livemint.com
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