Coal India falls 12% in September on weak June quarter results

Thus far in the month of September, CIL underperformed the market by falling 11.5 per cent, after reporting a sharp 60 per cent year on year (YoY) decline in its consolidated net profit at Rs 2,800 crore in the June quarter (Q1FY21). Operational revenue was down 26 per cent YoY at Rs 18,487 crore during the quarter. In comparison, the S&P BSE Sensex has slipped 2.2 per cent so far in the month.

The continuing COVID-19 pandemic has impacted the firm's business adversely. For Q1FY21, CIL's offtake was 120.42 Mill Ton against, a reduction of 33.07 Mill Ton over the last year. This was mainly due to less demand from power sector as well as closure of industries in the non-regulated sector due to Covid-19.

The company has set an ambitious dispatch target of 1bt by FY24E, which analysts at Systematix Shares and Stocks (India) believe will be difficult to achieve given the competition from the renewable energy sector, government’s focus on auctioning coal blocks and the company’s past dispatch growth.

As per the 2019-20 annual report, e-auction premiums also declined to 47 per cent in FY20 vs. 77 per cent in FY19. Further, the brokerage firm believes that raising prices will not be easy due to the higher share of output from Mahanadi Coalfields (MCL) and South Eastern Coalfields (SECL) going forward - both have a high proportion of low GCV (gross calorific value) coal in their output and global weakness in thermal coal prices amid the economic slowdown and gradual de-carbonisation of the power sector.

While E-Auction ASP/t should fall, analysts at JP Morgan believe that overall E-Auction revenues should be flattish on higher E-Auction volumes in FY21E. The brokerage firm believes continued elevated coal inventories and weaker power demand would impact 1HFY21 negatively and normalize from FY22 onwards.

“COAL has seen the most severe de-rating over the last three years, from a around 9x EV/EBITDA to <5x. While there have been increasing ESG (Environment, Social, Governance) concerns, we believe the bigger driver of the de-rating has been the on-tap government supply of paper and now surging receivables from the power sector,” JP Morgan said.

“We believe India’s coal demand should increase structurally over the next decade, and the issue with the company is in meeting demand. Increased private sector participation in coal mining and commercial coal sales are positive for the company, as it would allow for fewer price restrictions,” it said with ‘overweight’ rating on the stock.