Coal India profit runs ahead of estimate

Rising volumes, along with control over costs, boost the company's profitability

Coal India's performance is being driven by a remarkable turnaround in volumes, which is driving growth in the current soft realisation environment. The company, which in the past had struggled to ramp up production and off-take (sales), is now not only seeing better production helped by mine clearances and new mines starting production, but is also easing bottlenecks on evacuation, leading to better off-take.

The company's production at 144 million tonnes (mt) was up 9.3 per cent year-on-year, whereas off-take surged 10.7 per cent year-on-year to 138 mt, which boosted its December 2015 quarter performance, even as coal prices remained weak.

Revenues at Rs 18,972 crore may have come slightly lower than Bloomberg consensus estimate of Rs 19,378 crore, but Ebitda (earnings before interest, tax, depreciation, and amortisation) at Rs 4,820 crore was way ahead of Rs 4,017 crore estimated by analysts. Thus, net profit at Rs 3,718 crore was almost eight per cent higher than the estimate of Rs 3,455 crore.

With rising output, the company can sell more coal through the more profitable e-auction route; e-auction volumes at 15 mt came ahead of analysts' estimates of 14 mt. Additionally, with costs under control, the per-tonne profitability was higher. Material and employee expenses came lower than analyst expectations, which contributed to profitability topping estimates, and despite lower Other Income and higher taxes the net profit grew a good 14 per cent year-on-year. Momentum in volumes is likely to continue.

For first 10 months of 2015-16, production and off-take are up 9.6 per cent and 9.8 per cent, respectively, ahead of expectations of about nine per cent. The company is likely to raise coal prices to better reflect the cost on gross calorific value on adjusted basis, say analysts at Motilal Oswal Securities. The exercise would lead to low-grade coal prices moving up, thereby adding to profits.

The new guideline for linkage coal auctions, where a reserve price is to be set (expected to be higher than notified price), has made analysts more optimistic on realisations. Analysts at Nomura say their FY17 earnings estimates for Coal India builds in a 6.1 per cent year-on-year uptick in blended realisation. They have a target price of Rs 401.

The consensus target price, according to Bloomberg, stands at Rs 405, for the stock priced at Rs 305. Overhang of government's share sale is keeping the stock under pressure.