We maintain ‘hold’ on Coal India (CIL) with a target price of Rs 285. At the current market price, the stock trades at 12.1x FY15e EPS. We perceive the penalty imposed by Competition Commission of India (CCI) to have a limited impact on the company. Issues of new fuel supply agreement (FSA) obligations, lower-than-expected realisations and sluggish volume growth are expected to pressure earnings.
Nevertheless, at the current price, Coal India shares trade at a dividend yield of ~5% (based on FY13 dividend) with the possibility of an additional dividend of Rs 18-20 per share. This would support the stock in the near term.
Reports indicate that CCI has imposed a penalty of Rs 1,770 crore on CIL for abuse of its market-dominant position and unfair provisions in contracts. However, the penalty amounts to only ~Rs 3 per share and is likely to be contested by the company. CCI had imposed a penalty on cement companies in June 2012, but it is still under litigation, with only 10% paid recently as deposit. CIL may be required to change certain FSA clauses, but we don’t see material impact. Signing of new FSAs and weak realisations seem bigger concerns.
We expect EPS to decline to Rs 23.7 in FY15e from Rs 27.5 in FY13 led by loss of incentive (R1,300 crore), recent disappointment in realisations, diversion of eAuction coal to FSA customers and penalty for short supply. We estimate the company to be obligated to supply 137 mt coal to new FSA customers in FY15.