Higher Sales, Prices to Power Up Coal India
Of 9-11% in FY17-19 and 6.2% dividend yield to support stock
ET Intelligence Group: Coal India’s financial performance in the December 2016 quarter was weak when compared with that in the corresponding quarter of the previous year. In addition, there are concerns over the employee wages which are due for negotiations and volatility in international coal prices. But, in the coming quarters, it may be able to improve performance given an uptick in sales volume and an upward trend in prices.
In the December 2016 quarter, sales volume rose by 4% year-on-year and by 23% compared with the previous quarter. The company sells nearly 85% coal through regulated channel to power plants where prices are fixedannually.Theremainingissold through electronic auction where price follows international trend.
With increasing international prices, demand for the e-auction improved. Sales volume through this routeincreasedby66%year-on-year in the December quarter and contributed over 18% to revenue compared with 11.3% in the year-ago quarter. The trend may continue in the coming quarters as well, which is a positive for coal India as realisation in e-auction is around 20-25% higher than coal sold on contracts.
Employee wages is a major factor for Coal India since it constituted nearly 44% of the company’s revenueinthefirstninemonthsof FY17. If the company were to implement 10-15% increase during the forthcoming round of salary negotiations, it may dent earnings.
Analysts expect Coal India to deliver 9-11% earnings growth from FY17-FY19. At Wednesday’s closing price of ₹ 320.8, the stock traded at 18.5 times FY17 earnings, which appears expensive for this kind of growth and will limit the upside. But, a high FY17 dividend yield of 6.2% will also limit the downside.