After dull FY17, Coal India set to shine in FY18

Improving volume trends, price hikes and higher realisations should boost FY18 performance

Coal India’s FY17 volumes were not something to write home about. Against a target of 598 million tonnes (mt) during FY17, it delivered only 543.16 mt, about nine per cent lower than the target, and grew just 1.6 per cent over FY16 volumes. However, this is due to sales getting impacted by the destocking at power plants during the first seven months of FY17. However, after October, sales have caught pace as demand from the power sector has improved.

The volumes, which had remained flat during the April-October period, have grown five-six per cent in the November-April period, which is positive. The company reported 6.3 per cent year-on-year (y-o-y) growth in dispatches in March 2017, making it the fifth consecutive month of good growth (of over five per cent). The March quarter, too, witnessed a strong 5.8 per cent y-o-y growth in dispatches. 

The outlook for volume growth from here on remains strong. Analysts at Kotak Institutional Equities say they expect the growth momentum to continue, aided by a favourable base of weak volumes in the first half of FY17. Improving price trends and continued volume momentum have led them to upgrade ratings. Analysts at Ambit expect offtake to grow seven per cent annually over the next couple of years, anticipating power demand growth of about six per cent, keeping coal demand from the sector at a stable level. Also, they expect import substitution to push further growth with about 20-25mt of imports getting substituted by supplies from Coal India. 

Coal India had not only disappointed analysts and investors on volumes during FY17, but also on soft e-auction realisations, as demand from the power sector declined and lower international coal prices did not help. However, as coal prices have rebounded from lows and as demand is improving, e-auction realisations that had seen lows of about Rs 1,348 a tonne in the September ’16 quarter have already improved to Rs 1,564 in the December ’16  quarter. Analysts at Ambit indicate the prices have touched about Rs 1,900 a tonne-levels. Overall realisations will also get a boost as the company had taken fuel supply agreement (FSA)-related price hikes in May last year. Though fuel supplies under FSA may have been low in FY17, after the recovery now, the benefits will flow. The company had also taken a 10 per cent price hike for coking coal supplies that contributes about 10 per cent of overall sales. 

On employee wage hikes, analysts estimate about 15 per cent increase in employee costs and it has been factored in. Analysts at Kotak Institutional Equities, too, say while stock prices factor in net profit impact from higher wages, stronger volumes in March quarter, coking coal price revisions, and improving trends for e-auctions make for a more promising FY18. Meanwhile, a good dividend yield is an added positive and also provides downside support.