Revival hopes soar for Coal India

Weak demand and realisations impacted the performance in Q2 but prices and volumes are rising again

Coal India’s performance in the September quarter, expected to be sluggish by the Street, was even lower. Sale volumes at 115.987 million tonnes was lower than 122 mt a year before and from the 133.2 mt in the June quarter. The blended realisation at Rs 1,350 a tonne was also lower than the expected Rs 1,390 or more. And, so, revenue from sales was 7.8 per cent less, year-on-year, to Rs 15,645 crore, compared to the Bloomberg consensus of Rs 16,576 crore.

Higher wage provisioning had an impact, too. Employee costs surged 14 per cent over a year by Rs 1,073 crore; other expenses also increased. Consequently, operating profit was Rs 743 crore as compared to the Bloomberg consensus estimate of Rs 2,787 crore; net profit at Rs 600 crore was also significantly lower than the expectation of Rs 2,254 crore.

Following the disappointing quarter, analysts are lowering their earnings estimates for the company. The analysts' consensus target prices that stood at Rs 358 (as per 15 analysts polled on Bloomberg in last two months before the results) have also come down to Rs 320 (as per 15 analysts polled on Bloomberg on 13 and December 14).

This also explains why the stock, which was already under pressure in last 2-3 months as e-auction prices were almost nearing FSA (fuel supply agreement) prices and as higher wage provisioning was being looked at as a dampener for earnings, fell 4.4 per cent to Rs 292.25 on Wednesday.

The downside from here, however, could be limited, given the cushion from beaten-down valuations. Also, November saw some respite. Production and offtake reversed a three-month decline, growing by five and six per cent, respectively, over a year before. Led by an increase in power generation (nine to 10 per cent) as compared to an otherwise flat trend in the previous four months. E-auction realisations for October also improved to Rs 1,792 a tonne from an average of Rs 1,534 a tonne in the past four months, say analysts at Ambit Capital, who believe the near-term concerns have bottomed out.

They remain watchful, though. While a pick-up in volumes/realisations is inevitable in the long run, they say, the key over the next two-odd months is whether the spurt in power generation sustains structurally or not, led by improved working capital of state electricity boards after demonetisation.

Another factor on the positive side is the rising international coal prices, which are likely to push up realisations for Coal India too. Hence, investors with a longer term investment horizon can consider the stock on dips. The strong dividend yield also remains a positive for investors.