Concerns easing after earlier anxieties

Coal India’s stock, amid volatility, had failed to give positive returns during 2011-12 and underperformed till mid-May this year. However, some positive triggers such as good monthly production and sales numbers for April and May have provided confidence on the ability to deliver a healthy increase of five to seven per cent in output in 2012-13. This, in turn, has eased concerns on reduction in higher priced e-auction quantities and non-priority sectors.

These events have turned analysts positive on the company. They believe there is steam left in the stock despite the 11 per cent rise since mid-May. The one-year consensus price target for the stock is Rs 374, indicating a 13 per cent upside from the current Rs 331.

Improving output
Production and sales growth in FY12, a key reason for the stock’s underperformance, have shown strong traction during the past five months, including April and May 2012. Coal India’s May 2012 production and dispatches at 35.6 million tonnes and 38.8 mt increased 7.7 per cent and 10.1 per cent year-on-year, respectively. Combined April and May production (69.4 mt) has grown 5.7 per cent year-on-year, while dispatches at 76.5 mt are up 6.2 per cent.
 

MARGIN BOOST
	FY13E	FY14E
Net sales (Rs cr)	68,881.20	74,689.20
% change	10.4	8.4
Ebitda(Rs cr)	20125.0	22390.4
% change	29.2	30.0
Net profit(Rs cr)	16553.0	18593.5
% change	11.9	12.3
EPS (Rs )	26.2	29.3
PE (X)	12.7	11.4
* % change is y-o-y Source: Company, analyst reports

This is positive news (given that FY10-12 saw growth of just two per cent) and instills confidence that growth momentum seen in the March quarter (production volume at 144.6 mt was up 26 per cent sequentially and 10 per cent year-on-year) is continuing. This uptick in the March quarter had helped the company cover the production and sales deficits seen in the early part of FY12 due to incessant rains.

Rail wagon availability
Rake availability, too, has been better, boosting dispatches. May saw a loading rate of 178 rakes daily (11.3 per cent higher year-on-year). This is also much better than average daily rake availability of 168 in FY12 and 162 rakes in FY11. Analysts at Motilal Oswal Securities, in their takeaways from the analyst meet, say rail-related evacuation constraints are easing and Coal India is focusing on developing internal railway sidings to enable movement from mines to the point of loading.

Going ahead, Coal India is targeting production and dispatches of 464 mt and 470 mt in FY13, growth of 6.5 per cent and 8.5 per cent, respectively. Analysts suggest that for achieving this, it plans 10 mt higher production in the September quarter through better preparedness during the monsoon. They also expect approval to increase mining production by 25 per cent from the 13 identified blocks (to provide 30-40 mt).

Analysts at Daiwa Capital, though bullish on the stock and optimistic on volumes, see production and dispatch growing four per cent during FY13, given flat production over FY10-12. However, analysts at Motilal Oswal Securities model a production and dispatch of 462 mt and 465 mt during FY13 and this, in their view, represents a turnaround on operational parameters , an important trigger for stock valuations.

Realisations improving
Coal India had to roll back price rises during January 2012. However, it is still seeing better realisations. Analysts say this is because of a switch to Gross Calorific Value-based pricing. Bhavesh Chauhan at Angel Broking says while blended realisations increased 13.9 per cent year-on-year during the March 2012 quarter due to change in the pricing mechanism to GCV, FY13 would see an eight per cent increase in realisations, offsetting the increase in staff costs.

Concerns on the fuel supply agreements with the power sector have been handled tactfully by Coal India so far, say analysts. While its board had approved a minimal penalty of an average of 0.01 per cent of shortfall in supplies, it is also negotiating the minimum supplies part well. More important, it does not intend to divert any portion of coal from e-auction sales, the more profitable option.