Robust sales, profit growth seen

The Coal India scrip has risen more than 30 per cent since the revision in prices in end-February. The hike has rubbed positively on its performance in the June quarter. Though offtake was slightly lower than the company’s expectation of an increase of seven per cent, profits jumped and were a little short of the $1-billion mark. Analysts observe that offtake has picked up in July, though availability of rakes (railway wagons) continue to be the key for this to sustain.

While raising the prices, the company had partly factored in the pay increments effective from July. Analysts say another price rise, expected by the end of the year, is likely to keep margins intact after the wage negotiations.

The combination of increase in volumes and prices will help the company sustain healthy growth, say analysts. According to Bloomberg data, 67 per cent of the analysts have a buy rating on the stock.

PRICING GAINS
in Rs crore	Q1’FY12	% chg
Net sales	14,499	26.8
Ebitda	4,820.00	55.50
Margins (%)	33.20	613 bps
Net profit	4,144	64.10
% change is Y-o-Y;  Source- BSE, Analyst reports

BETTER OFFTAKE, PRICES
The average sales price at Rs 1,365 a tonne was higher by 12 per cent sequentially and drove up profitability, despite higher provisions (up 307 per cent at Rs 296.5 crore). Profit also got a boost from a 44 per cent rise in other income (to Rs 1,558 crore) due to higher interest income.

In volume terms, coal production at 96.3 million tonnes was slightly higher than the year-ago quarter’s 95.15 mt. However, offtake at 106 mt rose at a better pace over the corresponding quarter’s 101 mt, mainly due to better availability of rakes. Average availability of rakes at 165-168 a day, though lower than the 175 rakes desired, was seven to nine per cent higher on a year-on-year basis.

Analysts observe that offtake during the quarter was affected by heavy rains and logistics issues and say it would pick up. A Bank of America- Merrill Lynch report observes the July offtake at 35.8 mt has already improved by seven per cent, year-on-year. However, rake availability will be key and if the same rate as July is continued through the quarter, an estimated 185 rakes a day will be required in the second half.

OUTLOOK
Going ahead, Coal India will start providing for wage revision provisions from the September quarter, as negotiations are to start soon. The earlier price rises were undertaken looking at this fact, too, and analysts at Citi say the company, after examining margins at the end of the year, may look at price revisions to maintain profitability.

What remains to be seen is the impact of the draft mining law. If passed, the company would have to share 26 per cent of its coal profits with local populations. Citi reports indicate an impact of 10-11 per cent on profits, though such would help Coal India to expedite land acquisition.

Overall, analysts remain positive. Those at Prabhudas Lilladher expect its earnings to grow 24 per cent annually during 2010-13, despite increasing wage costs and an uncertain regulatory environment.

Priced at Rs 390.70, it trades 16.7 times its 2011-12 consensus earnings estimate.