Q1 disappoints, but worst may be over for Coal India

After encouraging August volumes, analysts expect better run rate in H2

Though Coal India’s (CIL) August sales numbers gave investors a reason to cheer, the soft June quarter (Q1) performance was a disappointment. The stock, thus, declined 1.2 per cent on Thursday — Q1 results were reported on Wednesday.

With the nationwide lockdown impacting the economy, coal demand from power producers and other industries suffered. This was reflected in the Q1 performance as its sales volume declined 21.5 per cent year-on-year (YOY), and realisations suffered, too. The more profitable e-auction realisations, which had softened from ~2,847 per tonne in

December 2018 to ~2,100 levels before the lockdown, fell by a further 26 per cent YOY to ~1,568 per tonne in Q1. Now, it is close to realisations for coal supplied under fuel supply agreement (FSA) at ~1,359 per tonne.

With FSA volumes declining 22 per cent YOY to 102.2 million tonnes (mt), e-auction volumes down 17 per cent YOY to 15.9 mt, and prices soft, net sales at ~17,007 crore declined around 27 per cent.

At the operating level, write-backs of ~250 crore on overburden removal partly helped, and Ebitda (earnings before interest, tax, depreciation, and amortisation) at ~3,051 crore beat expectations of ~2,541 crore. Pre-tax profit at ~2,800 crore was marginally lower than the consensus estimate of ~2,813 crore.

The bad news though ends there. A weak Q1 might have disappointed, but the recovery in economic activities and CIL’S sales volumes are positive.

CIL’S Mahanadi coal fields have been instrumental in driving production growth of 7 per cent YOY and sales volume growth of 9 per cent in August. Though year-to-date sales volumes were down 13.4 per cent, the trend has reversed. The declining inventory from 75 mt in May to 61 mt also raises confidence.

Rupesh Sankhe at Elara Capital feels volumes and e-auction realisations might have bottomed. With soft international prices, e-auction realisations might not see steep recovery, but will be better than Q1. On volumes, CIL remains aggressive and is looking to substitute imports. The benefits should reflect during second half (H2) as economic recovery gains pace.

Emkay Research, too, expects restoration of a 20 per cent mark-up in e-auction prices from October, which should trigger the next uptick in the stock, as they expect rise in volumes in H2. Credit Suisse also expects CIL to benefit from operating leverage as coal demand improves, and, thus, maintains outperform rating on the stock.