Better days ahead for Coal India

Improving realisations, closure of unviable mines to drive earnings

Coal India’s performance in the December quarter marks a recovery, it was better than expected on the profitability front and could prop up investor sentiment. Earlier, the firm’s performance was affected by destocking of coal inventories by power sector customers, wage hike provisioning and grade slippagesrelated issues. This affected investor sentiment as well.

Reported sales volumes grew 7 per cent, aided by increased supplies to the power sector. The proportion of supplies, under fuel supply agreements (FSAs), to power sector customers — cheaper by 20 per cent — weighed on realisations. But higher e-auction realisations helped sustain Q3 realisations at levels seen in the year-ago period. Thus, reported sales grew 6 per cent year-on-year (y-o-y), to ~216.4 billion.

Improving e-auction realisations were at ~1,998 a tonne in Q3, compared to ~1,564 a tonne in the corresponding period a year earlier. FSA realisations are expected to improve in the March quarter, given that Coal India raised prices in January. Analysts said the company’s recent, larger-than-expected, FSA price hike of over ~100 a tonne was a major positive, and would likely result in an accrual of ~64 billion in additional annual revenue. This would be in addition to ~25 billion revenue increment from the evacuation facility surcharge. ICICI Securities analysts added that the e-auction premiums could stay strong in the near- to mid-term, as power utilities stocked up to meet peak summer demand.

Coal India was also able to rationalise costs in Q3. Operating profit, at ~46.2 billion, improved 20 per cent yo-y; excluding overburden removal, it was up 19 per cent at ~55.4 billion. Net profit was up 4 per cent y-o-y at ~30 billion, ahead of consensus estimates of ~27 billion.

Against this backdrop, analysts remained positive on Coal India’s realisations and volumes prospects. Motilal Oswal Securities said concerns around grade slippage and wage hikes were now over and volume growth, operating leverage, closure of unviable underground mines and high natural (employee) attrition remained key earnings drivers. They expected Coal India’s earnings to grow at a compounded annual rate of 30 per cent during FY18-20.

One area to keep track of is whether the company’s plans to move to gross calorific value (GCV)-based coal pricing will affect its financials. Globally, companies follow GCV-based pricing. Some analysts said such a move might offset benefits of recent price hikes. Analysts at Jefferies said there could be variances depending on the actual grade delivered, which could affect average realisation, but it was unlikely that the entire impact of the recent 10 per cent price hike might be negated, contrary to market fears.

Jefferies has a target price of ~350, while that of Motilal Oswal Securities is ~401 for the stock trading at ~301.