Coal India (CIL) shares opened Tuesday's trade with gains of nearly 5% — its strongest opening gains in nearly two-and-a-half years — after the company announced an increase in prices for the first time in two years. While the stock gave up some of its gains, it closed at a three-month high of R322.95.
Tuesday’s gain was of 3%, which added to the 1% gain of Monday. While part of the upside was driven by a better-than-expected 35% increase in the net profit announced by Coal India on Monday, it was the 4% price hike that led many analysts to turn optimistic on the stock as it would help neutralise the effect of the increased mining cost and lower e-auction prices.
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“The decision of a price hike could trigger up to a 10% upgrade in the consensus earnings estimate for CIL for the current fiscal,” said Rakesh Arora, MD & head of research with Macquarie Capital Securities. On Tuesday, Deutsche upgraded the stock to ‘buy’ from ‘hold’ and raised the 12-month target price to R360 from R345.
The market was also enthused by CIL’s recent decision to increase the dividend payout ratio to about 50% by announcing a dividend of Rs 14 per share at a time when CIL is sitting on a large cash-pile of R62,236 crore. However, analysts believe that a stated dividend policy rather than a one-off increase would give greater clarity to investors.
JPMorgan, in a recent note, highlighted that it is only in the last two years that CIL has raised dividends sharply. “A stated higher dividend payout policy would likely result in multiple re-rating for the company,” the report said.
While the stock gained for a second day, pending issues, including the planned 10% divestment in CIL and the dispute with state-run NTPC over the quality of coal, will be crucial in determining the stock's performance in the coming days.
Nomura, in a post-result note, pointed out that CIL's 2012-13 receivables witnessed a sharp uptick towards R10,500 crore, largely on the back of payments withheld by NTPC and few other state-owned power generation companies due to coal quality issues.
“Besides these precise concerns, the stake sale itself has acted as an