Coal India: Weak Q3, but downside limited

Profitability misses expectations, but e-auction rates, volumes, demand give comfort

With Coal India posting lower-than-expected profitability for December quarter (Q3), its share price fell 1.23 per cent on Monday. However, there is an improvement in key parameters on a sequential basis, which suggests numbers should get better unless the final wage hike is higher than seen.

For Q3, wage costs and provisioning for wage hikes led to decline in profitability. Employee-benefits expenses increased 10.4 per cent year over year (or Rs 772 crore), provisions more than doubled (up Rs 208 crore) and over-burden removal adjustments (related to mining operations) rose 9.5 per cent year over year (up Rs 705 crore), all pulling down operating profit by 21.3 per cent year over year to Rs 3,856 crore, lower than Bloomberg consensus estimate of Rs 3,974 crore. With other income also down Rs 212 crore, net profit at Rs 2,885 core fell short of Rs 3,059-crore expectation.

Net profit may have declined 20 per cent year over year, but after a disappointing September quarter, it is up almost four-fold sequentially as operating profit has grown five times.

Coal India was under volumes pressure since July due to lower power production in the country and declining e-auction sales (which are typically market-driven). Nevertheless, e-auction sales have rebounded since November on uptick in power production. Q3 saw production increase 2.6 per cent year on year to 147.7 million tonnes (mt), while sales volume at 142.2 mt increased 3.2 per cent year on year and 23 per cent sequentially. E-auction volumes increased 66 per cent year on year to 25.2 mt and per-tonne price has recovered from lows of Rs 1,348 in September 2016 quarter to Rs 1,564 now, even as the rate is yet to catch up with Rs 1,866 seen in December 2015 quarter.

With coal prices having moved up sharply in second half of 2016, the company has already hiked coking coal prices in January, its second rise in FY17 after hikes for FSA supplies in May-end. FSA is fuel supply agreement. 

E-auction rates, power production, and coal prices inching up should help even as concerns on wage hikes remain. Benefits on FSA price hikes hinge on grade mix and demand improvement.

Analysts at Religare Institutional equities believe e-auction prices have bottomed out and expect Coal India’s metrics to stabilise as FSA rates move up and negotiations over staff expenses conclude. Strong dividend yield also gives comfort.