Coal India: Earnings momentum gaining pace on high realisations

Rising coal production & prices should help deliver strong profit growth though Q2 numbers missed estimates

Even as Coal India remains in the news given the government’s concerns of not achieving its targeted production and sales, as well as the company’s September quarter (Q2) performance falling a tad short of estimates, there is cheer for investors.

First, the company’s Q2 performance was strong. Firm e-auction realisations, price hikes on non-coking coal taken up earlier, inclusion of evacuation facility charge, and better realisations on coal supplied under the fuel supply agreement (FSA; mainly to power plants) are all benefitting the company in the current fiscal year.

Blended realisations grew 13.5 per cent year-onyear (YoY) to ~1,508 per tonne during the quarter pulling up the overall performance, even as sales volume growth (impacted by monsoon) increased by just 4.4 per cent YoY. Overall, net sales grew 18.5 per cent YoY to ~207.12 billion in Q2.

Moreover, the company has been able to keep costs under control. Wage provisioning costs, grade slippage worries etc, which impacted its FY18 performance, are behind. Thus, operating profit at ~39.14 billion surged 378 per cent YoY.

With other income almost doubling, helped by evacuation facility charge (~7 billion) introduced since December 2017, net profit at ~30.84 billion came significantly higher than ~3.70 billion in the year-ago quarter. Net profit, however, was marginally short of the Bloomberg consensus estimate of ~31.37 billion.

Yet, analysts remain positive on the company. Those at Kotak Institutional Equities expect the earnings momentum to continue, on the back of double-digit growth in realisations and healthy volume growth.

Contained wage cost and double-digit revenue growth should drive FY19 net profit by 131 per cent YoY — a marked improvement over the trend of past two years, say the analysts.

Though the company may miss the production target of 630 million tonnes (mt) for FY19 set at the start of the year, output at 603.8 mt and offtake at 616.8 mt — according to Jefferies estimates — would still mean a 6.8 per cent and 6.3 per cent YoY growth, respectively.

Some analysts, however, are more optimistic on this front. Rupesh Sankhe of Reliance Securities expects volume growth to pick up, looking at low inventory levels at power plants.

He remains positive on e-auction realisations too. Eauction sales, where prices are not regulated or fixed, are far more profitable. Per tonne realisations surged 61 per cent YoY and 8 per cent sequentially to ~2,592 in Q2, and tight supplies of domestic coal are expected to keep pricing firm.

The management, too, is working towards pushing up output. Any progress on this front could surprise markets. For now, after the results, nine of the 12 analysts polled by Bloomberg have a buy rating on the stock while the remaining three have a hold/neutral rating. Their average target price of ~332 indicates potential an upside of 25 per cent.