Volumes key for Coal India after surprisingly strong Q4 performance

Higher prices aided profitability but e-auction realisations falling

The surprisingly strong March quarter performance of Coal India (CIL) — the largest coal mining company of the country — was driven by better-than-expected realisations.

Per-tonne realisation for coal supplied under the Fuel Supply Agreement (FSA; pre-determined prices typically lower than market rates), was up 4 per cent year-on-year (YoY) at Rs 1,460, while e-auction realisations surged 30 per cent YoY to Rs 2,754. Therefore, revenues grew 6 per cent YoY to Rs 28,546 crore, better than the Rs 27,283 crore indicated by Bloomberg estimates. Volume growth, however, remained at about 3 per cent YoY during Q4.

Better realisation, along with cost-control measures, helped adjusted operating profit grow 4 per cent YoY. While wage costs remained high, CIL was able to maintain coal grades (quality) and improve productivity through measures such as shutting down old mines.

This trend is expected to continue. Analysts at Motilal Oswal Securities say cost of production (CoP) was down 1 per cent YoY on a cash basis over the last two years. Excluding wages, the decline was even steeper. Net profit, adjusted for one-offs, though down about 2.3 per cent YoY at Rs 6,027 crore, thanks to lower other income and a high base of FY18, surpassed estimates of Rs 5,013 crore.

Despite a strong Q4, CIL may not see similar trends hereon, given that e-auction realisations are falling due to softer global coal prices.

Moreover, while FSA-led price hikes since January 2018 have driven FSA realisations in FY19, these will reflect in the base in FY20. The more profitable e-auction volumes are also falling (down 43 per cent YoY in Q4) on account of rise in supplies to the power sector. Hence, e-auction revenues declined 25 per cent YoY in in Q4.

In this backdrop, growth in volumes remains key to future earnings. The lumpy volume growth profile was key to analysts being cautious on CIL in the past.

The Q4 results and cost-control measures have led to analysts turning positive. But those at Prabhudas Lilladher have given ‘hold’ ratings given the weak volumes outlook (5.3-5.5 per cent growth in FY20/FY21). Dividend yield of about 8 per cent, however, remains supportive. CLSA analysts say the stock can be a defensive play amid global headwinds in the resources sector.