A worker carries coal in a basket.  (Mumbai)
A worker carries coal in a basket. (Mumbai)

Coal India profit beats estimates in Q4, but outlook lacks the spark

  • Coal india’s FSA volumes fared better year-on-year than e-auction coal in the March quarter
  • For Fiscal year 2019, the company’s overall volumes of the fuel increased by 4.8%

Sentiment on the Coal India Ltd stock may have perked up marginally on the back of an encouraging set of March quarter numbers, announced after market hours on Thursday. On Friday, while the broader markets were subdued, the miner’s stock closed slightly higher.

(Vipul Sharma/Mint )

Still, over the medium-term perspective, muted outlook on coal sold through the e-auction route is likely to keep a lid on any meaningful expansion in valuations.

In the fourth quarter, e-auction volumes fell by 43% year-on-year. Although e-auction realizations are typically higher as they are linked to international coal prices, Coal India could not reap the gains from here.

Despite the fact that e-auction realizations increased by a strong 30% year-on-year, lower volumes translated into lower e-auction revenues.

Interestingly, coal sold through the fuel supply agreement (FSA) route fared well. FSA volumes increased by almost 13%, whereas realizations increased by around 4%.

Overall, revenues increased by 7.5% over the same period last year to 28,546 crore. This was helped by a modest 3% increase in sales volume (offtake).

Reported net profit showed an increase of over 360% on a year-on-year basis to 6,026 crore. It’s worth noting here that this increase was helped by a favourable base.

“Headline growth was aided by non-recurring wage cost of 74 billion (7,400 crore) in 4QFY18, as well as additional wage-linked provision of 15 billion (1,500 crore) for full-year FY2018," Kotak Institutional Equities said in a 31 May report.

Still, according to Kotak, Coal India’s reported profits were higher than the brokerage firm’s own estimates of about 4,700 crore.

As far as the stock is concerned, it is encouraging that valuations appear inexpensive. Currently, the company’s shares trade at 9.4 times estimated earnings for FY20, based on Bloomberg data.

However, these valuations are hardly exciting when the outlook doesn’t look bright. Specifically, the tepid outlook on the e-auction segment needs to be watched.

“Going ahead, we see mixed bag for the company as progressively, higher FSA realisation pursuant to better grade control is encouraging," wrote analysts from Edelweiss Securities Ltd in a report on 30 May. E-auction premium is expected to come off further, mirroring international coal prices, resulting in muted earnings growth, added the brokerage firm.

“Global thermal coal prices have been on a declining trend since Dec’18 as import demand from major importing countries like China and India have softened due to higher domestic production in the respective countries," said analysts from SBICAP Securities Ltd in a report on 2 May. However, the impact of lower global prices may be offset by higher volumes in case of Coal India.

As such, investors will watch volume growth as well. For FY19, Coal India’s volume had increased by 4.8%. In general, analysts are factoring in about 4-6% volume growth for FY20.

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