Coal India profit could double this year

Healthy volume growth as well as robust demand are set to boost earnings in the near term

On a day when most stocks in the benchmark Sensex were in the red, Coal India bucked the trend, ending 1.5 per cent higher. The gains were on the back of strong volume growth expectation, rising global prices and robust demand.

While the first reading of a marginal year-on-year growth in dispatches for September was a disappointment, it was on the back of the monsoon and a higher base. Over the six-month period from April 1, when the financial year began, growth has been a steady 8.1 per cent, yearon-year. Analysts expect strong production and volume performance, going ahead.

The demand outlook remains strong, with power plants seeing low coal inventories. The rising international price and rupee depreciation are making imports dearer; rising crude oil and gas prices also have a bearing. Thus, with favourable demand and pricing trends, the company is on

track to report strong earnings growth in 2018-19, after subdued performance in 2017-18. Rupesh Sankhe at Reliance

Securities believes net profit in FY19 could be double that of FY18. The stock reaction is, thus, not a surprise.

Coal inventory, at 10 days’ need over the past five months, had decreased to seven days in September. As many as 13 thermal plants with critical/supercritical inventory are located in the west (areas of shortage), of a total of 19 across India. This should keep coal demand strong from the power sector.

Analysts at Edelweiss Securities expect international thermal coal prices to remain robust, owing to production cuts (for environmental reasons) and a deficit of 115 million tonnes this calendar year in China, and limited output rise elsewhere. For domestic consumers, the cost of import is dearer with a depreciating rupee, pushing up demand in the domestic arena from both the power and non-power sectors.

Not surprisingly, coal supplied through e-auction is seeing a rise in premiums. This route is also more profitable as compared to that supplied under a fuel supply arrangement (FSA). E-auction premiums rose to 93 per cent in August from 76 per cent in July; analysts note these are well above those in FY18.

Coal India had hiked prices in January and with revised loading and surface transport charges, FSA realisation has improved, being up nine per cent in the June quarter over a year before. Notably, the provisioning for higher wages that had added to cost and grade slippage issues are also behind it.

Analysts at Kotak Institutional Equities say they expect the earnings momentum to continue on the back of double-digit growth in realisations and good growth in volume.

Over the longer term, the company hopes to hit the one billion-tonne annual production mark by 2022-23. This is to be aided by identification of mines with capacities that can support production and help achieve an additional 100–150 million tonnes per annum in evacuation capability. This is expected to be achieved through doubling of railway lines and building new rail corridors, to be completed by FY20, and value-enhancement at 56 loss-making mines.

The overhang of the stake sale, that had kept stock prices under check, is also behind with it having been deferred. Analysts at Nomura say outlay for a share buyback in FY19 would be capped at ~29.2 billion (1.6-1.7 per cent of equity shares outstanding, assuming a buyback price of ~275-300 each). Notwithstanding a share buyback, Nomura believes a healthy interim dividend in the final quarter of FY19 remains probable. Good dividend yield has been one of the key reasons for investor interest in Coal India.