Price hikes boost CIL's confidence

The 6.3% FSA price hike announced by the company will translate into additional revenue of about Rs 3,200 crore which is equivalent to 4% of FY16 revenues

Coal India disappointed with its March quarter performance but the announced price increases encouraged the Street. These were under fuel supply agreements (FSAs) to power units, a little over 80 per cent of Coal India’s sales volume.

Notably, this increase after three years will support earnings. The stock gained 3.8 per cent to close at Rs 292.05 on Monday; the results were announced on Sunday.

The 6.3 per cent FSA price rise translates to an additional Rs 3,200 crore a year, four per cent of FY16 revenue. A large part of it should also flow to the bottom line. Largely sparing the non-power sector was needed to keep prices here competitive against cheaper imported coal.

Kamlesh Bagmar and Ankit Shah at brokerage Prabhudas Lilladher say realisation would increase by eight per cent for volumes in the power sector, compared to flat to one per cent lower in the non-regulated sector. Per-tonne, realisations would improve by Rs 75 for non-coking linkage volumes, they add.

Analysts at IIFL say the increase after three years, first under this government, will help shed scepticism on the government’s willingness to allow price increases to offset the impending sharp rise in employee cost (from pay rises). It also increases the credibility of estimates, since earnings would have had to be cut in the absence of a price increase.

Volume growth from here will be crucial. On the positive side, the company saw production and sales volumes grow by nine and 9.2 per cent, respectively, in FY16. This is despite having to move slowly in the last quarter, due to soft demand and increasing inventory.

Keeping the volume rate at about 11 per cent annually over FY16-18 will be tough in the presently benign demand environment. Still, Bagmar and Shah say the price rise and revival of volumes in May would surely allay the over-pessimism factored into the stock, overlooking the strong demand outlook and structural capabilities built in logistics and productivity.

They have a target price of Rs 330 for the stock, while analysts at IIFL give Rs 343 and those at Religare suggest Rs 370.

For the quarter ending March, the company posted net sales of Rs 20,759 crore, compared to Rs 20,774 crore a year before. Operating earnings at Rs 5,534 crore declined 7.2 per cent over year, understandable with the downturn in commodity prices. Profits at Rs 4,248 crore were comparable to Rs 4,239 crore in the year-ago quarter, helped by lower taxes.