Coal India Ltd’s (CIL’s) nightmarish September quarter results caught everyone napping, sending its shares down on Wednesday. Consolidated Ebitda declined by a whopping 78% year-on-year to Rs743 crore. Ebitda was way below Street estimates. For instance, Jefferies India Pvt. Ltd was expecting the company to report a figure of Rs2,838.5 crore, a miss of 74%. Ebitda stands for earnings before interest, taxes, depreciation and amortization.
Where did the Street go wrong? One reason was a higher than expected increase in costs. Employee costs rose 10%, compared with the June quarter and by 14.6% year-on-year. The coal producer made an ad-hoc provision of Rs710 crore towards salary and wages.
A decline in price realizations was another contributing factor. In the September quarter, CIL’s average price realizations declined about 3% over the same period last year to Rs1,350 a tonne. Sure, one could argue the measure is higher than the Rs1,336 a tonne seen in the June quarter. But it’s worth noting that September quarter numbers include the full benefit of price hikes on fuel-supply agreement (FSA) coal taken in end-May.
Realizations for coal sold via e-auction were disappointing. Analysts say premium of e-auction coal over that sold through FSA route has dropped to about 4% in the September quarter. This premium was 27% and 36%, respectively, in June 2016 and September 2015 quarters.
On top of all this, CIL’s sales volume declined 5% year-on-year. The upshot: operating revenue declined 7.7% to Rs15,645 crore and net profit dropped 77% to Rs600 crore. That brutal cut in earnings saw its share fall by 4.4% on Wednesday, compared with a 0.4% decline in the broader market. One CIL share currently trades at about 14 times estimated earnings for this fiscal. The stock has performed more or less in line with the Sensex this year so far.
What next? The question that will worry investors is if this quarter marks a shift in trend or is merely a blip. How e-auction premiums shape up is one part of the answer. E-auction premiums seem to have bottomed out now, wrote analysts from Credit Suisse Securities (India) Pvt. Ltd, adding that October 2016 e-auction premiums were at a 23% premium to notified prices (regulated sector). CIL’s volume saw year-on-year growth in November after registering a decline in October and is positive, especially if it continues. Coal inventories at plants are normalizing, which should see steadier offtake. One risk is from the impact of demonetization on industrial output and, therefore, the indirect impact on coal demand. The stock will take cues from how these factors play out in the months to come and will be volatile if they don’t indicate a clear trend.