As the consumption of power fell sharply in Q1, Coal India’s dispatches were hit, sliding 22% y-o-y
Analysts point out that revenue could shrink by about 9% this year, which would hit operating leverage
The Coal India stock may not generate much steam this year. As power consumption fell sharply in the first quarter, with offices and factories closed, Coal India’s dispatches were hit, sliding 22% year-on-year (y-o-y). With economic activity likely to remain sluggish, demand for coal may stay low for a while, which will weigh on its stock price. Coal India shares are down 36% from January highs.
Coal India’s Q1 revenue growth contracted 26% y-o-y, higher than what analysts had pencilled in. In addition, fuel supply agreement prices fell about 6% sequentially as demand from power plants slipped. The company has also cut its production expectations to about 650 million tonnes for the year from 700 million tonnes earlier. It produced about 195 million tonnes till August. Hence, it will have to ramp up production significantly to meet its target, which seems difficult.
One positive is that economic activity is recovering, and power demand is almost back to 98% of pre-covid levels, which is encouraging for Coal India. Already, the firm has shown about 9% y-o-y improvement in growth during August. Still, with coal inventory at power plants quite high, it may not see offtake improve significantly this year.
Analysts point out that revenue could shrink by about 9% this year. With higher costs and lower revenues, operating leverage is expected to get impacted. In Q1, in fact, adjusted operating profit halved from the year-ago period to 15.1%, due to negative operating leverage. E-auction premiums have come off. “Given the drop in e-auction premiums, we might witness incremental pressure on Ebitda in Q2," said Siddharth Gadekar, analyst, Equirus Securities.
But the company reported better-than-expected profit growth, thanks to a write-back in overburden expenses during Q1.
Analysts point out that its cash position could improve in the second half, as receivables convert to cash. “The company has cash of ₹33 per share. We believe that with liquidation of receivables in H2, the cash position shall improve and management shall be able to declare a dividend. We expect a dividend of ₹9.5 in FY21," said analysts at Emkay Global Financial Services in a client note.
While Coal India shares have corrected sharply post the pandemic, its valuations have risen. With profits set to shrink this year, the stock’s valuations have increased to a price-earning multiple of about 7 times FY21 earnings. This is higher than its historical averages of about 5 times. But if the company is able to maintain high dividend, yields can be fairly high. Using the estimated dividend mentioned by Emkay, the dividend yield works out to nearly 7% at the current share price of ₹136 apiece.
But for the stock’s re-rating, coal prices may need to increase significantly to bolster operating profit growth in the coming quarters. But given the economy is not fully recovered, we cannot expect a considerable uptick in prices this year.
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