Coal India: Near-term concerns cloud outlook
Wage revision and uncertainty on coal grade to put pressure on stock
Rising costs and downgrades of its mines, coupled with weak quarterly performance saw the Coal India (CIL) stock hit its 52-week lows recently. The key concern for the Street is rising employee costs due to ongoing wage negotiations. Even though CIL has been provisioning for wage revisions, the Street feels the actual rise may be larger. Added to this is higher costs related to gratuity payments. The proposed amendment by the government towards doubling the gratuity limit to ~20 lakh would put an additional one·time burden of ~4,000 crore on the company’s earnings, said Kamlesh Bagmar and Amit Khimesra at Prabhudas Lilladher. While the management expects to neutralise the impact partially through reduction in leave encashment days of executives, the development adds to existing concerns on rising employee costs, they said.
Added to this is uncertainty on the impact of mine degradation. The company has seen grade slippages impacting overall profitability. During the March quarter, its operating profit fell by 39.2 per cent year-on-year (y-o-y) to ~3,388 crore, primarily attributable to higher provisioning towards the pending wage revision and for grade slippage. Analysts at Kotak Institutional Equities say that the de-grading of several coal mines since April poses new uncertainty; it is yet unclear how much this compounds the impact of grade slippages, already factored in and uncertainty on this issue will likely subside only after results for the June quarter. The CIL management, in recent analyst meets, however believes that with quality control measures in place, grade slippages should not happen and it expects better grades of existing mines moving forward.
The company recently indicated 37 unviable underground mines would be shut by 2017-18. The identified surplus manpower from these mines would be redeployed at nearby mines to reduce further loss in these mines. The company’s plan to shut down some unproductive mines, rationalise costs and shift employees to alternative locations, while putting near-term pressure, is a positive.
Amid these concerns, the company is likely to see better volume growth during FY18, driven by demand. For AprilMay 2017, the company has seen better liquidation of inventories as dispatches grew four per cent y-o-y. Analysts at Reliance Securities say they expect volume and realisations to recover in FY18 and add that valuations of 12.3x of FY19 earnings seem to be inexpensive.
Thus, while improving volumes and inexpensive valuations coupled with dividend yield will cushion the downside, the clarity on wage revisions due on July 1 and grade slippage, among others, will be key to upsides.