Coal India's volumes fail to pick up in May, earnings likely to decline

Coal India’s production and sales for May disappointed the Street, leading to over 3 per cent fall in its share price on Tuesday. Worse, the April and May figures, along with pricing and costs estimates, suggest FY21 earnings of India's largest coal mining company may see a significant decline.

With the start of some economic activity and a slight pick-up in power demand, some increase was expected in the company’s coal volumes in May. 

Coal India’s offtake for May, however, largely came at the levels seen in April, and was down 23.3 per cent year-on-year (YoY). Cumulatively, April-May saw the offtake declining 24.4 per cent YoY. Coal production for May, too, was down 11.3 per cent YoY to 41.43 million tonnes (mt), and 11.1 per cent YoY for April-May to 81.81 mt.

The decline in sales during peak months means that volumes for the full year may see a significant impact. Coal India had already seen sales volumes fall 4.3 per cent in FY20 to 582 mt. Edelweiss expects it to further decline in FY21 to 547 mt.

Prior to the lockdown, the company had set a production target of 710 mt for FY21, as compared to last year's 602 mt. So, it will have to scale it down, depending on how the Covid-19/lockdown situation plays out, say analysts.

 

 

The volume disappointment is not good news at a time when international coal prices and domestic e-auction realisations are under pressure. About 90 per cent of Coal India's annual output is sold under fixed-price contracts, and rest through market-determined prices via e-auctions. The e-auction coal has seen the average premium (compared to base price) fall steadily from a high of 131 per cent in December 2018 to 36 per cent as of March 2020. Analysts, thus, have lowered their per tonne e-auction realisation estimate to Rs 2,000 for FY21, compared to about Rs 2,200 in FY20 and Rs 2,632 in FY19.

With realisations and volumes declining, profitability could be at a higher risk given Coal India's high fixed costs. Employee costs account for 50 per cent of total expenses and with the focus on overburden removal for future ramp-up, the company will continue using contractual employees, say analysts at Motilal Oswal Financial Services. The brokerage has cut its adjusted Ebitda estimate for FY21 by 11 per cent, and expects Coal India's current-year earnings to decline 39.1 per cent YoY.

The only respite for investors is Coal India's sound balance sheet. 

The high dividend yield of about 7 per cent, however, will be monitorable given the expected decline in profits.