No respite for Coal India in Q1

Continued wage provisioning pulled down profitability

Coal India’s June quarter (Q1) performance missed the Street’s expectations, mainly due to lower-than-expected realisations. Given the disappointing numbers and muted expectations on volumes, analysts are likely to lower their earnings estimates.

In Q1, while coal supplies under fuel supply agreements (FSA) were estimated to increase two per cent year-on-year (y-o-y) to 110 million tonnes (mt), the actual number remained flat at 107.14 mt, because of weak demand from power sector customers. Per tonne FSA realisation at Rs 1,201 was also disappointing.

Analysts had expected FSA realisations to decline about two per cent y-o-y to Rs 1,215 levels on the back of grade slippages. Earlier this year, the company’s 177 mines had seen a downward revision in coal grade (due to quality issues). FSA accounts for almost four-fifths of the company’s revenue.

Per tonne realisation in the more profitable e-auction (open market) segment at Rs 1,586, a bit better than Rs 1,570 in the year-ago quarter, was also lower than expectations. Looking at rising international coal prices, the Street had expected higher e-auction realisation. Analysts at Motilal Oswal Securities had pegged it at Rs 1,700 per tonne. The only positive was a surge in e-auction volumes to 27.27 mt in Q1, from20.46 mt a year ago.

Net sales at Rs 18,434 crore, too, missed Bloomberg’s consensus estimate of Rs 19,738 crore. Overall sales volumes increased three per cent y-o-y to 137.37 mt during the quarter.

As the company continued to provide for wage increments applicable from July 1 and accordingly made Rs 778 crore of ad hoc provisions in Q1, it weighed on its profitability. But, this wasn’t a surprise as Coal India had provided about Rs 2,100 crore in FY17, and had indicated total wage provisioning of Rs 3,000 crore. So, some relief can be expected in the September quarter unless the actual numbers are higher than the estimates.

Earnings before interest, tax, depreciation and amortisation (Ebitda) came at Rs 3,401 crore in Q1, lower than Rs 3,862 crore in the year-ago quarter. Net profit at Rs 2,351 crore was also lower than the consensus estimate of Rs 2,560 crore, even as other income was up about 10 per cent y-o-y at Rs 1,207 crore.

While the September quarter has begun on a positive note, with Coal India’s dispatches up 6.9 per cent in July versus a three per cent growth in Q1, analysts are sceptical of the company achieving volume growth guidance of 10 per cent for FY18.

E-auction realisations, which have improved in July, could provide some cushion to the stock (at Rs 238.65), now near its all-time intra-day low of Rs 234 as well as its 2010 IPO (initial public offering) price of Rs 235. The Street will remain watchful on the outcome of wage negotiation, as a higher-than-expected increase in employee costs can also impact estimates.