Independent directors may ensure minimum impact on company
We maintain our 'buy' rating on Coal India (CIL) with a price target of Rs 450, based on a PE (price-to-earning) multiple of 15x FY14e EPS (earnings per share). Media reports indicate that the coal ministry, after receiving instructions from the Prime Ministerís Office (PMO), is preparing a formal proposal on price pooling. Media reports also highlight that it is likely that the coal ministry will ensure there is no adverse impact from price pooling on CILís financials. This is in-line with our view that pooling is not going to be detrimental to CIL.
It looks possible that CIL will have to import fuel to meet growing demand once the mechanism for coal price pooling is finalised. However, we believe that price pooling for imported coal is not very easy to implement, although private generation utilities remain hopeful.
Earlier, CIL referred the issue to the state electricity boards (SEBs) and this delayed the process further as, in general, SEBs cannot really afford too expensive power. Overall, price pooling for imported coal is good as a concept. However, we see many issues with implementation. We believe the outlook for a start any time soon does not look positive. In any case, we do not expect CIL to bear the cost for pooling or imported coal. Hence, this would not have any financial impact on CIL, in our view.
It is important to note that one of CIL shareholders, TCI, has filed a lawsuit against the directors of CIL alleging that they have failed to protect the financial interests of CIL. There have been multiple occasions where CILís directors have simply vetoed any move/resolution by the board which they thought could negatively impact CILís financials. Last month, the independent directors also questioned why coal to sectors where the end product price is unregulated should be sold at regulated prices. Even in the case of price pooling, we strongly believe that the directors on the board (particularly the independent directors) would oppose any mechanism that has an adverse impact on CIL from price pooling.
Revised FSA prices to incorporate the price of imported coal: We understand that the proposed mechanism may be based on the principle that CIL may import coal and revise the notified price for FSAs (fuel supply agreements) in such a way that all consumers share the burden uniformly irrespective of their usage mix (proportion