Near-term worries outweigh Coal India's Q1 gains; stock falls 1.6%

Though Coal India delivered better-than-expected performance for the June quarter, the Street was not convinced given the near-term worries on pricing and stake sale. The stock declined 1.6 per cent on Wednesday.

While the performance in Q1 was lifted by better realisations for coal supplied under Fuel Supply Agreement (FSA), analysts are worried about declining international coal prices. The pressure on coal prices is leading to cheaper imports for major consumers with access to ports. This means declining e-auction prices.

The other worry for the Street is the stake sale by the government to meet its divestment target for the fiscal year. Further fresh auction of coal mines to private players can also lead to higher competition for Coal India. It is not surprising then that the stock has been trading close to its 52-week lows since the start of the month and is down 24 per cent since its highs in June.

On the operational front, the company’s FSA realisations at Rs 1,370 per tonne have increased 6 per cent year-on-year and came better than analyst expectations of about Rs 1,310 per tonne helping drive the company’s revenues. This helped sales grow 3.64 per cent year-on-year despite declining share trend of more profitable e-auction realisations. The increase in FSA realisation was due to hike in coking coal prices at two of company’s subsidiaries BCCL & CCL along with higher sales to the non-power sector (about 4 million tonne higher year-on-year), say analysts. The coal supplied under FSA contributed about 87.24 per cent to overall raw coal supplies.

Though e-auction realisations are higher than FSA realisations at Rs 2,155.26, they declined 10 per cent year-on-year and 22 per cent sequentially. This remains a cause of concern. However, with blended realisations at Rs 1,513 (3.6 per cent higher year-on-year) and company’s controls on cash costs (flat year-on-year) meant that operating profit still grew 30 per cent.

The higher other income helped add to the FSA realisations helping profits grow by 22.3 per cent.

On the volume front, the company saw flat production of 136.94 million tonnes (MT) and off take of 153.49 MT during the quarter. While this was also on a large base of last year, street will be watchful on volume growth moving forward. Analysts at Motilal Oswal Financial Services (MOFSL) expect volumes to increase 5-6 per cent, however analysts at Prabhudas Lilladher Research remain concerned. They note that the company continued to disappoint on volumes with deteriorating visibility from operations. The sales volume in last four months fell by 2 per cent year-on-year and the performance is unjustified in light of two major rail lines (loading incremental 20 mtpa or 3.5 per cent growth over FY19 base) commissioned in Odisha and Jharkhand during the latter part of FY19.

The stock has fallen sharply due to dilution of the government’s holding in the company as well as weak operational performance. This has made the stock attractive at valuations of 3 times its EV/Ebitda and 6.3 times its price to earnings for FY20, say analysts. Looking at beaten down valuations, analysts have upgraded the stock rating and target prices indicating an upside of 17-40 per cent. The dividend yield of 9-10 per cent as per MOFSL also remains attractive.

However, the Street will remain watchful on volume growth and e-auction realisations. The concerns on demand slowdown due to the trade war between the US and China and government stake sale plans will keep sentiment subdued in the near term.