Sales volume growth key for Coal India
Coal India’s record on meeting its output goals hasn’t been great
A Mint report this week said that the Union government has reduced the production target for Coal India Ltd (CIL) from 660 million tonnes (mt) to 600 mt for fiscal year 2018 (FY18) due to tepid demand for the fuel from thermal power plants.
The CIL stock was nevertheless indifferent to this cut in the target, showing that nobody expected the firm to meet it in the first place. To be sure, the country’s biggest coal producer’s record on meeting its output goals hasn’t been great.
In FY17, CIL’s production was 93% of the target of around 600 mt. In FY16, actual production was at 97% of the target of 550 mt.
The reduced target is realistic, according to some analysts. But there are a few others who believe that the company won’t be able to produce even 600 mt and will fall short of the target this year as well. At 600 mt, CIL will have to clock a year-on-year production growth of 8% this year.
In any case, it is offtake (or sales volume) which is more crucial for the company. Growth in offtake was a paltry 1.6% in FY17. The low base may help offtake growth this year. Motilal Oswal Securities Ltd expects offtake to grow 6.8% to 580 mt this year and by 6.6% to 618 mt in FY19, driven by the substitution of coal and pet coke imports, and an end to destocking.
Meanwhile, the CIL stock has shed nearly 8% so far this calendar year. The company paid a hefty dividend of Rs19.9 a share this March. If one were to include the dividend, the share price is down around 2%. One share currently trades at about 13 times estimated earnings for this fiscal year. But the scope for valuations to expand further appears limited.
Recently, CIL’s coal grades from its mines were re-evaluated, leading to a downward revision in some mines based on the quality of coal. The impact of the same on its price realization will be worth watching. Even so, some analysts believe that last fiscal year’s results already capture the adverse impact of quality slippages to some extent. Analysts say that some customers are already making payments depending on the actual grade of coal supply based on third-party assessment.
“Despite 6.4% hike in FSA prices in May 2016, CIL’s FSA realization in FY17 has remained flat year-on-year due to grade slippages,” pointed out a report from Jefferies India Pvt. Ltd. FSA refers to coal sold through fuel supply agreement. Perhaps, then, incremental damage due to the recent grade slippages may not be as bad as some anticipate. CIL’s June quarter results will offer a clearer picture of that.