Brokerages remain upbeat on Coal India post Cabinet decision; stock down 2%

Shares of Coal India lost around 2 percent intraday after the government on Tuesday allowed private sector to mine coal and sell it for commercial use.

The move ended state-owned CIL’s monopoly in a bid to cut imports by raising domestic output.

The Cabinet Committee on Economic Affairs (CCEA) approved the auctioning of coal mines to any firm bidding the highest per tonne price, Minister for Coal and Railways Piyush Goyal said briefing the media.

At present, private sector firms are only allowed to mine coal for use in their cement, steel, power and aluminium plants. Coal India Ltd (CIL) is the sole commercial miner with 80 percent market share.

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Goyal said the opening up of commercial coal mining for private sector is the most ambitious coal sector reform since the nationalisation of the sector in 1973.

The reform, he said, is likely to bring efficiency into the coal sector by moving away from the era of monopoly (of CIL) to competition and lower power tariffs. He said the move will lead to higher investments and create lakhs of direct and indirect jobs.

“It will increase competitiveness and allow the use of best possible technology into the sector. The higher investment will create direct and indirect employment in coal bearing areas especially in mining sector and will have an impact on economic development of these regions,” the minister said.

The government had in 2014 auctioned 29 mines to private players and states for capital use in power, steel, aluminium and cement plants. In the following year, it permitted the allotment of coal mines to states for mining and commercial sale to medium, small and cottage industries. Close to 16 mines were allotted to several states

Brokerages, however, have a positive stance on the development and believe that it could increase cost curve and benefit Coal India. Plus, cost structure of these operations could be efficient, relative to Coal India, they said.

Brokerage: Macquarie | Rating: Outperform | Target: Rs 210

The global research firm said that the price-based auction would increase cost curve and benefit Coal India. Further, it believes there could be a record Q4 for this fiscal. The company should witness an all-time high EBITDA & should drive earnings upgrades, it said in report. Additionally, valuations at 6.7xEV/EBITDA FY20E makes risk-reward attractive.

Brokerage: Morgan Stanley

The global research firm said that from the company’s perspective, the key will be aggression in auction bids. Further, cost structure of these operations may be efficient relative to Coal India, it said, adding that still there could be a few years for mining to start.

At 10:12 hrs, Coal India was quoting at Rs 305.25, down Rs 5.00, or 1.61 percent. It touched an intraday high of Rs 312.00 and an intraday low of Rs 305.00.moneycontrol