Coal India: Here's why analysts predict a 25% fall in its FY21 earnings

Lockdown impact on volumes, lower e-auction share to hit profits

The steeper-than-expected fall in Coal India’s net profit for the March 2020 quarter (Q4) affected the Street's sentiment, with the stock declining 5 per cent on Monday.

The lockdown for nine days during Q4 meant coal sales volumes were flat at 164 million tonne (MT). The net profit fell by almost 23 per cent year-on-year (YoY) to Rs 4,626 crore, and was much less than the consensus estimate of Rs 5,024 crore. Though the decline was also due to a higher tax outgo, even profit before tax was down 16.3 per cent. Amid weak coal demand, the fall in high-margin e-auction prices impacted blended realisation, which, along with higher costs, took a toll on the operating performance.

E-auction realisations fell 24 per cent YoY to Rs 2,105 per tonne in Q4, say analysts. So, even as e-auction volumes were up 26 per cent, the contribution of e-auction declined 3.8 per cent YoY. Due to lower e-auction prices, blended realisations, too, declined 5 per cent YoY to Rs 1,532 per tonne.

Coal India’s higher fixed costs, especially that of employees, coupled with a 50 per cent rise in CSR (corporate social responsibility) expenditure, an 18 per cent increase in contractual expenses (Rs 4,500 crore), and higher provision for over-burden removal (up 26 per cent YoY) led to a 25 per cent YoY fall in earnings before interest, tax, depreciation and amortisation (Ebitda) to Rs 4,758 crore, way lower than the expectation of Rs 6,765 crore. The rise in other income helped limit the fall in the pre-tax and net profit.

 

 

Moving forward, weak demand and soft international coal prices remain key concerns. The company’s cumulative April-May sales are already down 24.4 per cent YoY. With high coal inventory at power plants and weak demand from power and other user industries, e-auction realisations are already down to about Rs 1,600 a tonne against the notified price of Rs 1,450 a tonne, say analysts. The demand impact during the ongoing quarter has been significant, says Rupesh Sankhe at Elara Capital. Analysts say the June quarter can see almost 60 per cent decline in the net profit.

While Coal India may target import substitution up to 100 MT to boost sales, analysts remain watchful. Costs are likely to remain high due to investments in overburden removal to ramp-up production, as well as in coal evacuation equipment. Therefore, FY21 earnings may see much more impact, beyond the expected hit from lockdown and economic slowdown.

Analysts at Kotak Institutional Equities, who estimate earnings to decline by 25 per cent during FY21, say a 15 per cent decline in e-auction revenue and lower coal demand will weigh on the earnings trajectory in FY21.