Today’s pick is COALINDIA [stockquote]COALINDIA[/stockquote]. The stock had a real good start of the year with an uptrend till May, but it could not sustain the momentum and crashed to its support levels at Rs. 300. The stock has been in an uptrend since June, touching its 52 week high around Rs. 380. In the last three months, the stock has moved – 4% vs. 5% of the Nifty’s.

COALINDIA technical analysis chart

Oscillators RSI and CMO are in no man’s land suggesting no direction for the stock.

The MACD line and the signal line are moving close to each other – directionless. Both long-term and short-term GMMA lines are seeing a constrained movement leading to an indecisive future for the stock. Short-term technical gave an 18×9 bearish signal for the stock last week.

COALINDIA correlation chart

COALINDIA’s average correlation with the Nifty is zero. The scrip will be not be replicating the movement of Nifty. [stockquote]NIFTYBEES[/stockquote]

COALINDIA volatility chart

COALINDIA has a historical volatility in the range of 0.3 to 0.9. The scrip’s volatility currently is in the lower range.

To conclude, given these technicals, the stock is a short-term HOLD. However, given the current up-trend in the progress, the scrip is a long term BUY with a resistance level close to Rs. 380.

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Coal India: In the pits?

Coal India Limited (CIL) faces headwinds from different quarters. Production targets have gone awry and the impasse over fuel supply agreements with power companies continues. Amidst all this, the coal behemoth has digested a 25% wage hike in February this year even though its attempts to effect a price hike have met with stiff resistance from key customers.

Coal India [stockquote]COALINDIA[/stockquote] sells coal at a discount of up to 78% to imported Indonesian coal, giving it solid headroom to raise prices. It sells 83% of its coal at the notified price under the fuel supply agreement (FSA) and 11% of its total production through e‐auction, which is priced up to 30% higher than the notified price. Regulated sectors such as power utilities, defense, railways and fertilizers receive their quota through the FSA. 

imageIn line with international pricing mechanism, CIL migrated to a new system for pricing its non-coking (NC) coal on the basis of Gross Calorific Value (GCV) of its various grades of coal from January 01 this year. Earlier, it priced its NC coal under the Useful Heat Value (UHV) based method.

Non-coking coal is mainly sold to power companies. By raising prices, CIL hoped to offset the impact of wage hike to its over 3.65 lakh employees that would entail an outgo of over Rs 6,500 crore.

imageBut within a month, it had to roll back the price hike under the new mechanism due to stiff protests from consumers in sectors such as power and cement. The new grading system would have given CIL an additional Rs 6,250 crore annually. Bowing to pressure, the government forced Coal India to put off the price hike and said it would review the new system after three months.

NTPC [stockquote]NTPC[/stockquote], which is Coal India’s biggest customer, has vociferously opposed the switchover to GCV-based pricing saying its input costs would soar. India’s largest power generator has also refused to sign the fuel supply agreement in its present shape.

CIL wades through a critical phase wherein key policy developments relating to coal / power sectors are in the pipeline like setting up of a coal regulator, auction of coal blocks, mining bill, etc.

imageOn the operational front, Coal India’s performance has been sub-par with production languishing at around 430 million tonnes for the last three years. Its inability to raise prices to offset the rise in input costs could adversely affect its EBITDA margins.

If CIL is to increase productivity, then a price hike is long overdue. Customers have a choice- either allow the coal PSU to raise prices and benefit from increased supply or pay through the nose for imported fuel. While CIL’s profitability has got a boost from higher realizations through e-auctions, better pricing power, faster environment/ forest clearances and solution to land acquisition issues is the key to drive profitability and earnings growth going forward.

Coal India–The Perils of Investing in PSUs

Coal India Limited (CIL) is at the receiving end from different quarters. While, on the one hand, it is facing the government’s wrath for failing to fulfill the country’s burgeoning coal demand, minority shareholders, on the other side, are crying foul at the lack of corporate governance standards at CIL and its failure to protect their interests.

clip_image002On Tuesday, the government issued a presidential directive to force CIL to sign fuel supply agreements (FSAs) with power producers to supply as much as 80% of the fuel requirements committed to power plants. Softening the blow, it however, allowed the PSU’s board the freedom to decide on penalty that would be payable in case it breaches the pact.

The presidential diktat was enforced after Independent Directors of CIL’s board, which has been holding discussions for the last few days, put their foot down on committing fuel supplies.

Going by CIL’s current output and ramp-up capabilities, independent clip_image002[5]directors felt it was impossible for the state-run miner to meet supply requirements and it may have to opt for imports which is a costly affair.

Instead, they questioned the lower price paid by the power sector for coal and suggested that CIL should cut down on fuel supplies to the power sector and sell excess coal through e-auction to augment profitability.

Amidst this furor over fuel supplies, investors are clearly not impressed at the way Coal India is being arm-twisted. UK-based hedge fund and CIL shareholder, The Children’s Investment Fund Management (TCI) has threatened arbitration against the Indian government, alleging that the government was going out of its way to help private power producers by pressurizing CIL.

TCI, which holds 1% stake in the monopolistic miner, has charged Coal India of selling the fuel at a price that’s up to 70% lower than the market price, hurting minority shareholders.

clip_image001The country’s powerful lobby comprising of Cyrus Mistry, Anil Ambani and other corporates, who forced the government’s hand on Coal India by knocking on the PM’s door for seeking solution to the power crisis, must be relieved as more than 25,000 MW projects will be kick-started. The demand-supply gap for coal, which stood at 84 million tonnes (MT) during FY 2010-11 is likely to touch 142 MT in FY 2011-12.

While the Prez decree will awaken Coal India from its clip_image001[5]deep slumber and help meet fuel requirements, the government would do well to address some pertinent issues that plague the miner than just issuing diktats. Coal India faces land acquisition problems and delays in environmental clearances due to which several projects have missed deadlines while domestic prices are yet to align with international rates, hurting the company’s profits. To make matters worse, the coal behemoth has almost been headless, critically hampering its decision-making. At present additional secretary in the ministry Zohra Chatterjee is filling the post.

If Coal India is to retain its tag as the darling of D-Street (thanks to its blockbuster listing), the government would do well to address these ‘bitter truths’ instead of just administering ‘bitter pills’.


Power sector in dire straits

A developing India needs proper supply of electricity to meet the growing demand from households and other sectors and sustain its economic growth. But there is a yawning gap between what is planned and what the power sector has delivered.


The government had earlier set a goal for adding 78,577 MW of electricity capacity during the 11th Five-Year Plan, which was scaled down to 62,000 MW by the Planning Commission in its mid-term review, citing environmental and land acquisition hurdles.

Other issues that have plagued the power sector include shortage of fuel, distorted prices of electricity, worsening health of power distribution companies, higher transmission and distribution (T&D) losses among others.

According to the Association of Power Producers (APP), a grouping of over 20 private power companies in the country, an estimated 52 power projects having total capacity of 68,563 megawatts are facing default risks at present.

clip_image002Coal-fired plants, which account for 55.9% of the country’s total power-generating capacity, are facing a severe scarcity of the fuel. The demand-supply gap for coal, which stood at 84 million tonnes (MT) last fiscal, is likely to touch 142 MT in the current financial year.

Coal India [stockquote]COALINDIA[/stockquote], which accounts for 80% of the country’s output, aims to produce 464 million tonnes in 2012/13, and has already scaled down output target to 440 million tonnes in 2011/12.

Coal India’s inability to ramp up output forced the PMO to intervene and direct the state run energy major to sign compulsory supply pacts with power companies.

Starved of fuel, power firms have been importing coal from Australia and Indonesia. Last month, a Bloomberg report noted that India is poised to surpass China as the world’s top importer of thermal coal with purchases exceeding 118 million tonnes this year in India compared with China’s 102 million tonnes. Domestic fuel shortage has led to increased reliance on imported coal for fuelling the additional power capacity.


Even as coal supply has run dry, other sources like gas have failed to bridge the supply gap.
With each passing day, gas production from RIL’s prized KG~D6 basin has been hitting new lows. Output stood at 41mmscmd in Q3 FY2012 compared to 45mmscmd in Q2 FY2012. Due to lack of gas from RIL’s block, several gas-based power projects by Reliance Power[stockquote]RPOWER[/stockquote], Lanco [stockquote]LITL[/stockquote] and GMR [stockquote]GMRINFRA[/stockquote] in Andhra Pradesh are sitting idle.


The Power Ministry’s pet project, Ultra Mega Power Projects (UMPPs), each of which is 4000 MW, face an additional problem of financing as lenders are unwilling to bear the risks associated with the execution of such large projects.




The fallout of these multiple set of problems has been an increase in impairments and restructuring of loans to the power sector.


Since the power sector is considered as a catalyst for economic growth, hard-core reforms are needed to make the sector more efficient and meet the heavy demand for electricity.

Policies must be evolved to ensure completion of on-going projects quickly and add new capacity in an efficient, least cost manner, greater reliance on renewable energy like wind and solar power, easy access to long-term finance, assured supply of coal and gas and an efficient distribution system.

A Coal Story

The Economist has an interesting article about power generation in India. Given the near impossibility of constructing large dams and nuclear power plants, coal is taking up an ever larger pie of our energy sources. However,

Coal India is not digging fast enough. Output has been flat for the past two years.

And the private sector reacts by setting up backups to backups in typical Indian fashion:

Private generating firms are not waiting to find out the answer to this identity crisis. Instead they have assumed that the state will not deliver enough and are prepared to import vast amounts of coal to fire their plants, either by acquiring it from wholesalers or by buying foreign coal mines. Some $7 billion has been spent in the past six years on pits in Australia, Indonesia and Africa. Gautam Adani, a Gujarat-based tycoon, is building a private network of mines abroad that feeds ports and power stations in India.

The high debt loads that this entails might drag down the banks:

The central bank has been forced to reassure financial markets that a wave of defaults in the sector will not hurt the banks, which have about 7% of their loans to the power industry, mainly to generation firms.

It’s a fun read. Go read the whole article.