Coal India’s Q3 results an improvement of sorts, but not enough

The govt plans to divest up to 10% in Coal India by August. That, coupled with weak volumes, will continue to weigh on the company’s share prices


Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

One might think Coal India Ltd’s (CIL’s) December quarter (Q3) financial results are a welcome relief after a miserable September quarter performance. After all, the coal producer’s consolidated net profit had declined a massive 77% in the September quarter. For the December quarter, net profit declined about a fifth from the year-ago quarter to Rs2,884 crore.

Still, last quarter’s numbers, announced on Saturday, have missed some analysts’ forecasts. For instance: Ebitda (excluding overburden removal adjustment expense) was lower by 5% and profit after tax by 8% versus Credit Suisse Securities (India) Pvt. Ltd’s estimates.

Ebitda is earnings before interest, tax, depreciation and amortization.

CIL’s operating expenses such as contractual expenses, other expenses and staff costs increased at a relatively faster pace, affecting profit growth. And then, other income declined 16% year-on-year.

This is at a time when revenue increased 3.8% in the December quarter, compared to a 7.7% fall in revenue during the September quarter. CIL’s sales volume or offtake increased 3.5% for the December quarter but average price realization increased just 0.7% to Rs1,385 per tonne.

But here’s the encouraging bit. Credit Suisse informs that e-auction coal prices’ premium recovered to ~22% over fuel supply agreement (FSA) coal prices (from just 4% in the September quarter). On the flip side, FSA realizations have increased just 1% year-on-year, reckon analysts. “December quarter FSA realizations’ performance despite price hikes in May reflect continuing grade slippages,” said an analyst.

The CIL stock declined 1.2% on Monday when broader markets were flat. Currently, the stock trades at about 14 times estimated earnings for the next fiscal year.

What are the triggers? Jefferies India Pvt. Ltd has trimmed its fiscal year 2018 earnings per share 5.8-6.5% factoring lower FSA average selling price (ASP), higher non-cash overburden removal provision and share buy-back. “Recent coking coal price hike and uptick in e-auction prices should lift ASP, but higher wage provision would weigh on margins,” pointed out Jefferies.

Additionally, volume numbers so far this year aren’t particularly impressive. From April-January, the company’s production and offtake has increased just 1.7% and 1.3%, respectively. Sure, more recently, January was a good month with offtake increasing 6.3% while production rose by 5.9%. Improvement in thermal power generation should boost volume growth in future and investors should keep tabs on that.

Meanwhile, according to The Economic Times, the government plans to divest up to 10% in CIL by August. This can be an overhang for the stock, say analysts. Collectively, all the above factors could well keep sentiments for the stock muted.

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