(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

Cost savings buoy Coal India’s operations, but investors are hardly moved

  • Part of the reason was a dip in realizations in the preceding quarter, which muted revenue growth
  • Thankfully, a control on costs and lower raw material consumption increased Ebitda by 16% year-on-year in the June quarter

Coal India Ltd’s first-quarter numbers were decent, but still fell marginally short of the Street’s expectations. This resulted in the stock correcting about 1.6% on Wednesday when most front-line metal and mining stocks staged a smart recovery.

Part of the reason was a dip in realizations in the preceding quarter, which muted revenue growth. However, compared to the year-earlier quarter, realizations were higher by about 4%. On the other hand, realizations from e-auction sales were lower by about 10% year-on-year.

This kept revenue growth soft at about 3.6% year-on-year. Thankfully, a control on costs and lower raw material consumption increased Ebitda by 16% year-on-year in the June quarter. Ebitda stands for earnings before, interest, tax, depreciation and amortization.

Coal India shut down some of its old mines to improve productivity and also cut back on additional expenses.

As a result, Ebitda margins received a fillip coming in at 26.5% in the June quarter, as against 23.5% in the year-ago period. However, point to note, that this is lower sequentially than the 28.8% margins seen in the preceding March quarter.

The Street has been looking for signs of improvement in the miner’s coal production and sales numbers. On that score, production of raw coal in the first quarter remained the same as last year at 137 million tonnes (mt). Sales volumes, too, were a drab at 153 mt.

The management had indicated earlier that production volume would be around 660 mt in FY20. Going by the current run rate, Coal India will need to produce about 169 mt of the fuel per quarter over the next three quarters, which means a significant ramp-up.

Going ahead, though, Ebitda growth, and cash flows could remain steady. “Ongoing efficiency measures and continued growth in volumes (our estimates 5-6%), should drive 5% EBITDA compounded annual growth rate over FY19-21, despite the high base of FY19," said a Motilal Oswal Financial Services Ltd note.

Yet, the Coal India stock has been struggling. Since the beginning of the year, the stock has corrected about 17%, despite carrying a dividend yield of about 8%. The company, though, continues to generate good cash flow.

However, earnings growth expectation remains soft. An overhang has been government divestment, which will increase the available free-float.

Not surprisingly, analysts have trimmed their valuation expectations. “Taking cognizance of divestment risk and muted earnings growth, we trim exit multiple to 8.5x (earlier 10.0x FY21E EPS)," said analysts at Edelweiss Securities Ltd in a recent note to clients.

Though, any ramp-up on production and sales by Coal India will be seen as a positive.

Close