Rebounding volumes signal recovery for Coal India

Volume growth in September and rising e-auction premiums improve earnings outlook

A 16 per cent year-on-year (y-o-y) growth in Coal India’s dispatches in September has not only pushed up the year-to-date run rate to 8 per cent, but also signals an improvement in the company’s prospects. The rise in September volumes follows a 19 per cent uptick in August. This boosts confidence in the company’s overall volume growth and earnings for FY18.

Analysts at JM Financial said offtake growth in the September quarter (Q2) was 14 per cent (following a recovery in August and September) and it should reflect in the company’s earnings.

The miner’s ordeal started in Q2 of FY17, with de-stocking of inventory at power plants. Overall demand for the miner’s produce took a hit, impacted by poor demand from the power sector, the key growth driver, as also from the profitable e-auction segment, leading to lower realisations.

 

Coal India’s stock price tumbled from close to Rs 350 in August 2016 to less than Rs 234 in August this year. Thus, a reversal in volume growth trend bodes well. A combination of factors such as low base, better power demand (aided by a decline in hydro generation, which pushed up power tariffs, too) has led to higher volumes for the firm. The rise in power demand led to a 17 per cent y-o-y increase in coal-based generation in August, a trend that has continued in September, and has been supportive of the miner’s strong volumes, analysts at Kotak Institutional Equities said. Coal stocks at power plants, which had reached a critically low level of six days as of September 2017, from 16 days in April, too, are going up.

Analysts at JM Financial said restocking at power plants, along with new additions (mainly 3,000 Mw from NTPC), were expected to lead to steady offtake growth for Coal India. 

They remain bullish on the stock from a long-term perspective, as even with a 6-7 per cent growth in volumes, the company can deliver higher earnings growth, given the low FY17 base and operating leverage benefit.

On the e-auction front, realisations have improved significantly after a 47 per cent jump in premiums in July. Growth in volume during August-September, coupled with rising e-auction premiums, fuel hope for a stronger revenue performance. 

The Street would now be eyeing the outcome of wage negotiations as earlier reports suggested a 20 per cent hike.

Analysts say the miner is trying to negotiate for a more favourable revision, and any positive outcome can add to the recent triggers. They believe the company will pass on the higher costs through price hikes.