Coal India buyback kicks off with little fire

Coal India’s maiden buyback offer got off to a lacklustre start on Monday.

The company has offered to buy back 10.9 crore shares worth ₹3,650 crore and has fixed the buyback price at ₹335, which is marginally higher than its current market price of ₹328.20. As of 3.30 p.m. on Monday, only 200 shares were confirmed for buyback, while over 1.19 lakh shares were yet to be confirmed.

Coal India’s stock has remained flat in the past one year and has gained only 11 per cent in the last three years despite rewarding shareholders with hefty dividends. This is because of subdued demand for power on account of muted economic activity and flat-to-declining coal prices. According to analysts, the company’’s fundamentals will continue to remain weak in FY17.

Analysts reckon that Coal India investors with a short-term horizon will be better served by selling their shares in its buyback.

Kotak Institutional Equities maintains a “reduce’ rating on the stock with a target price of ₹315. “The lead indicators for earnings for FY2017E are less encouraging. Absence of volume growth in first half of FY17 and an impending once-in-five years wage revision (increase in employee cost from September 2016 quarter) paint a bleak picture for FY17.

“Valuations are full and capex for an aggressive capacity ramp-up (that may not find takers) as well as non-core business ventures may further drain a liquid balance sheet,” it pointed out. Even Ambit does not see near-term catalysts for re-rating due to weakness in coal demand and prices.

However, G Chokkalingam, Founder, Equinomics Research and Advisory, is bullish on the long-term outlook, given that China will cut back its coal mining capacity by 500 million tonnes within five years. “Coal India will have sufficient cash even after the buyback and hence special dividends are not ruled out,” he said.

A high dividend payout ratio (in the range of 95-121 per cent in the past three financial years) has been the main attraction of the Coal India stock in the absence of positive triggers. The company was the top dividend-payer in FY16 with an outgo of around ₹17,300 crore. The company’s consolidated cash and bank balances and investments as on March 31 stood at ₹40,250 crore and the buyback will eat away only 9 per cent of this amount.

In the first half of FY17, while growth in production (including subsidiaries) has been flat at 0.1 per cent year-on-year, offtake has declined 1 per cent. Coal prices have been under pressure for many years now. Emkay Research pointed out in Monday’s report that international coal prices declined further to $53.2 a tonne, down 9.1 per cent y-o-y, while on a landed cost basis, they were marginally down 0.7 per cent.

Blended realisations in 1QFY17 are down 9 per cent y-o-y though the increase in notified prices of coal with effect from June 2016 will likely aid improvement. However, long-term concerns emerge from usage of coal-based power plants and the impact on offtake from the government’s thrust on renewable energy.