Coal India: what next after the price hike?
Hopes of a price hike after Coal India Ltd (CIL) introduced evacuation facility charges of Rs50 a tonne in December were probably running low. That perhaps explains why CIL shares jumped 5.6% on Tuesday after the coal producer announced it will increase prices of non-coking coal late on Monday.
This price hike is a much needed one and the quantum has surprised positively. According to analysts at IIFL Institutional Equities, the price hike effectively translates into ~11% increase over the FSA realizations during 1HFY18. FSA refers to coal sold through the fuel supply agreement route. CIL points out that the price hike will bring in additional revenue of Rs6,421 crore on an annualized basis and Rs1,956 crore for the rest of FY18. The additional revenue will fully offset the impact of the wage hike taken.
Following the announced increase in non-coking coal prices, IIFL has upgraded its Ebitda/profit after tax estimates for FY19-20 by 12%. Ebitda is short for earnings before interest, tax, depreciation and amortization, and is a key measure of profitability. “Higher realization led improved cash flows would lower need to access accumulated cash for maintaining dividend payout at Rs20/share over FY19-20,” added IIFL.
For CIL investors, it is encouraging that 2018 has started on a brighter note what with the stock appreciating a huge 15.6% till now. But go back a bit in time and the picture was not so pretty. Despite the recent increase in the share price, the CIL stock has underperformed the benchmark Sensex in FY18. Currently, the shares trade at nearly 14.5 times expected earnings for FY19, based on data from Bloomberg.
For further expansion in valuations, investors would do well to watch the volumes. Sure, offtake increased by 7.6% year-on-year for the April-December 2017 period and that’s not too bad. Still that’s lower than CIL’s target. In fact, the company is expected to miss its production as well as offtake target of 600 million tonnes each for FY18, and the outlook isn’t rosy.
“We see limited additional triggers with volume expected to grow ~5-6% YoY and FSA prices likely to remain stable at current levels,” point out analysts from Edelweiss Securities Ltd. “We see dividend yield at 4-6% to be the sole trigger over the next two years.”
Nevertheless, with the price hike now behind it, any surprises on the volume front could well bring some cheer for CIL investors.