No immediate respite for Coal India investors
Despite rising e-auction realisations, concern on costs & realisations stays
Coal India (CIL) has been in the news for its better e-auction prices in June, recommendations of the NITI Aayog on free pricing, and a proposal to restructure the company. Amid some positives, the company’s near-term prospects look subdued on realisation and cost worries.
The higher e-auction realisation in June is certainly positive for profitability. E-auction realisations had fallen sharply earlier this year when demand suffered, but have been recovering in the past couple of months. However, the bigger concern for analysts is the rising share of supplies under fuel supply agreements (FSAs), which are less remunerative, and realisations suffering after mine degradation.
While hikes in wages and gratuity are stressful for costs, the Street is worried about lower coal grades putting pressure on realisations. The higher share of FSA supplies is only adding to the woes. The wage negotiations are likely to be completed soon and clarity may emerge, but on coal grades, analysts feel clarity would come only after the first-quarter results.
CIL’s management, at an analysts’ meet, had said quality control measures were in place, and grade slippages should not happen. Consequently, they expect better grades in the future.
However, the Street is still not confident. Analysts at Jefferies had said the FSA average selling price could potentially fall 4.5 per cent sequentially in the June quarter, even if they assume no further impact of a grade reset.
They added CIL may consider price hikes in select segments (non-power) to cushion earnings, but this may not be enough to fully offset the impact of grade reset. Hence, Jefferies believed grade reset, mix shift towards higher FSA sales and lower incentives could weigh on the company’s realisations, and earnings outlook appeared unexciting. The high dividend yield potential, however, may offer some downside support.
Analysts see the NITI Aayog’s recommendations on free pricing as positive for Coal India even as they believe the move is aimed at having competitive prices after commercial mining by private players begins.
But, recommendations on splitting the company’s subsidiaries into independent entities will break the synergy benefits that accrue between subsidiaries, particularly at a time CIL is facing stress on profitability. Even though such moves have earlier been considered and not implemented, analysts say it adds to the already weak sentiments.
The company’s scrip, which on Friday closed at ~244.20 on the BSE, is near a two-year low and quite close to its initial public offering (IPO) price. Given the subdued outlook for FY18, the stock could remain under pressure. Analysts, however, are hopeful of FY19 prospects as mine degradation impact would have played out in FY18 and wage hikes would also be behind. Analysts at Antique Stock Broking, who have a price target of ~310, say managing costs will become the key metric for CIL.
While wage hikes are stressful for costs, the Street is worried about lower coal grades putting pressure on realisation