Coal India Ltd’s June quarter results had shown that the fuel producer had started the year well. While two swallows do not a summer make, it’s heartening to note that earnings growth was robust in the second quarter as well. Consolidated net profit of 3,086 crore for the September quarter broadly meets the estimates of analysts polled by Bloomberg.

What helped?

Primarily, realizations rose both for coal sold through the fuel supply agreement (FSA) route as well as the e-auction route. E-auctions, which account for 13% of volumes, witnessed a 61% jump in realizations, with demand outstripping supply by a mile. FSA realizations increased 7%, while volumes in the segment rose 12%.

Overall, the company’s operating revenue increased about 22% to 22,198 crore. Net profit shows a whopping growth of more than eight times over the same period last year, thanks to the increase in realizations as well as to a low base last year. Profits had fallen 40% in the year-ago September quarter.

Moving ahead, the outlook on offtake (or sales volume) is upbeat. So far this fiscal year (April to October), offtake has increased 7.4% over the year-ago period. For perspective, offtake had increased by 6.8% in FY18.

Coal stocks at power plants are low. Analysts expect power plants to continue restocking, which would support volume growth. What’s more, e-auction prices are likely to remain stronger even as volumes could be under pressure.

“Diversion of coal towards power utilities will weigh on e-auction mix. But tighter e-auction coal supply as a result will support strong e-auction prices in our view," wrote Bhaskar Basu of Jefferies India Pvt. Ltd in a report on 12 November.

As for the Coal India stock, it helps that valuations are not demanding. Currently, the stock trades at 10 times estimated earnings for FY19, based on Bloomberg data. “The stock offers over 7% dividend yield potential," points out Basu.

Of course, the fact that the company is exposed to the vagaries of the commodity cycle and government ownership means that not many investors may get excited about the low valuations.

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