Graphic: Mint
Graphic: Mint

Coal India’s low volume growth in August is no reason for concern

Analysts aren't concerned about the August growth rates, attributing the performance partially to last year's higher base

For Coal India Ltd, August marked the slowest production and offtake growth so far in this fiscal year. While production increased 3.2% year-on-year, sales volume went up by 3.5%. The miner accounts for more than 80% of the country’s coal output.

For perspective, in April and July, production and offtake had increased 14% and 11%, respectively. Nonetheless, analysts aren’t concerned about the August growth rates, attributing the performance partially to last year’s higher base.

In August 2017, production increased 16%, while offtake growth was even better at 19%. In fact, Edelweiss Securities Ltd’s analysts say the August 2018 offtake at 45.2 million tonnes is the highest ever the company has seen for the month. Besides, for April and August, production and offtake increased by 12% and 9.5%, respectively, which is not too bad.

“Going ahead, we estimate offtake to pick up further as seasonal weakness ebbs. Hence, there is a good possibility of CIL meeting/exceeding our full-year estimate of 620 million tonnes," said Edelweiss in a report on 3 September.

Coal India did well in the recently concluded June quarter. Its blended price realizations increased by 10% year-on-year. Price increase taken at the end of FY18 boosted realizations of the coal sold through the fuel supply agreement route. Further, strong global prices helped coal sold through the e-auction route.

Coal India investors though haven’t had much luck. The company’s shares lagged the benchmark Sensex substantially so far in FY19. Reports that the government is considering a 5-10% stake sale in the company have been an overhang.

On the bright side, valuations are not demanding. The Coal India stock trades at 10.5 times estimated earnings for FY19, based on Bloomberg data. The earnings outlook is also decent.

According to Kotak Institutional Equities, Coal India’s earnings, which have been plagued by increase in wage revisions and grade slippages for coal, will likely to see an improvement in realizations. This is on the back of an increase in notified coal prices, as well as an evacuation charge of 50 a tonne (in December 2017). Further, power demand is expected to be strong. Even as these factors augur well, investors will do well to watch news flow on the potential stake sale.