Coal India : Surprisingly positive news

It looks like some better sense has prevailed at centre. To bridge the deficit and meet Rs 40000 crore disinvestment target, Coal India might announce a  significantly large dividend (http://www.moneycontrol.com/news/cnbctv18-comments/finmin-may-declare-rs-1012-dividend-for-coal-india-source_649974.html). I had argued earlier that dividend is much better option than buying government stake in unrelated PSU’s. Dividend will be equally beneficial for minority shareholders.

The coal giant has also settled wage negotiations with workers under sixth pay commission. Effective hike would be 25%. This is a big positive for stock, since it removes uncertainty and fear of any kind of strike. Now stock performance would be a function of production ramp-up. I feel it has put kind of floor to Coal India stock price and should not go below 300 in short term. During Coal India’s earlier fall to closer to 300-305 levels, I had sold OTM puts. I have started squaring those puts now.

Coal India news update..

In Today’s BS there was a news article on Coal India selling higher amount of coal at e-auction prices (http://business-standard.com/india/news/coal-indias-profit-earning-strategy-turns-aggressive/457427/). This has obviously helped Coal India limit revenue loss despite its inability to ramp up production in first half of current fiscal. Although, the PSU giant has been able to ramp up production in November and will hope to maintain the same in December (http://www.thehindubusinessline.com/companies/article2675260.ece), I am not sure if sixth pay commission wage revision issues have been sorted out between workers and Coal India management. If not, then this issue will limit upsides in share price. Also there is increased risk that workers can go on strike if issue is unresolved.

If Indian government has its way, Coal India will be robbed off of its cash reserves very soon. GoI has been trying hard to find ways to generate Rs 40000 crore divestment target and 4.6% fiscal deficit. Coal India with its large cash reserves becomes a soft target. I don’t think this is right and it should not be allowed to happen. Coal India should be using its cash for making acquisition and buying overseas assets at a time when it is not able to ramp up its production. But as always, government does what it wants to do.

During 3rd week of November along with Nifty, Coal India also fell to its 52 week low. I had sold some December series 260 puts. It was absolute panic time. I have started covering my puts. In case Nifty rallies some more from here, then I might think of selling some Coal India calls. But as of now it is wait and watch in case of Coal India.

Coal India flip flop..

Last week Coal India was directed by the government to give power companies priority in coal supply over e-auctions. Company is allowed to e-auction 10% of its total production. Concern was mainly over the price at which it will be done. In  case the supply is done at long-term Fuel Supply Agreement (FSA) or notified prices then share price should correct some more. E-auction is done at market prices which is 70-80% higher than FSA prices. Coal Minister clarified that supply would be done at market prices http://online.wsj.com/article/SB10001424052970203914304576626872981845278.html.

But next day Coal India said, assured coal supply out of e-auction quota to NTPC would be done at FSA prices. It was a complete change in one day. Coal India share price continued to correct. PSU giant said price decision has been taken only for October and it will be reviewed every month. Apart from this new trouble, company is also negotiating with workers on bonus and wage issues. Workers have threatened to go on 3 day strike if their bonus demand is not met. Although after yesterday meeting with Coal Minister, workers have cancelled their proposed strike. Bonus has been increased from 17k to 20k.

It goes without saying that company is facing structural issues with production ramp-up. One issue or other is confronting company. Sometime it is  environmental clearance, seasonal monsoon or logistic issues like takeoff from pit heads. I think upside in Coal India is capped from current levels. For October series I have sold Coal India 380 and 400 calls. I have also sold 280 put.

Coal India follow up..

In one of my previous post https://writingoptions.wordpress.com/2011/08/20/coal-india-indias-most-valuable-company/ , I had written about selling Coal India 440 call. On Friday, I sold PSU 420 calls. In the last few days, there have been some negative news around Coal India. Twenty two mines of Coal India’s subsidiary Bharat Coking Coal Limited (BCCL) mines were banned by Jharkhand Pollution Board. Apart from mining ban, Coal India is also negotiating on the wage issues. Workers are demanding wage hike in excess of 100% whereas management and analysts had built-in 30% hike expectation. On Friday, the Supreme Court banned mining in two districts of Karnataka. This also had a negative sentimental impact on Coal India. Given all this news environment and weak market, I don’t think Coal India can cross 400 in this series.

Coal India: India’s most valuable company

Coal India became India’s most valuable company by overtaking Reliance Industries. Four years ago RIL became M-cap leader by toppling ONGC. Coal India had announced its Q1 results on August 12. Results were above estimates with consolidated PAT increasing by 64.1 percent to Rs 4144 crore. After Q1 result, Coal India rallied sharply to 400 odd levels.

I saw this as an opportunity to write Coal India calls. In this volatile market environment, PSU giant stock has been rock steady and acted as a defensive. But to think that Coal India will move another 12% from current levels would be too much. New draft mining bill, according to which coal producers would have to share 26% of profits with local people, will continue to be an overhang on Coal India stock. Although some of this would be passed onto buyers as price increase. With this thought I wrote September series 440 call. This call will yield 11.36% in 41 days. I am not saying that Coal India will fall from these levels nor will it increase substantially. I can write puts as well but in this volatile market I shall refrain myself from writing naked puts (When I wrote Nifty puts, I bought protection through higher level puts).