 "Coal India: Present tense, future perfect")
Coal India posted a lower than expected net profit which fell by 28% to Rs 2,192 crore for the quarter ended September 2014. The world’s largest producer of coal had posted a profit of Rs 3,052 crore for the same quarter last year. Analysts’ consensus was built around a profit target of Rs 2,980 crore. The lower profit came despite a marginal rise in sales, which grew by 1.2% to 110.46 million tonnes (MT) while output increased by 4.9% to 102.43 MT.
The lower profit was thus a function of product mix and higher costs. Coal India’s expenses increased at a faster rate than its sales, rising 8% because of higher employee benefits and higher cost of material. Despite marginally higher sales in volume terms the company could not transform the benefit to the bottomline since it sold lesser amount of coal through the electronic auction (e-auction) channel. In FY2013 these sales accounted for about 10% of its production but contributed around 40% of its operating profit. Any change in e-auction sales has a much higher impact on Coal India’s profitability.
Though details of e-auction for September quarter are not known, Bloomberg reports that sales through e-auction had dropped by 70% in the first two month of the quarter. Giriraj Daga of Nirmal Bang Equities feels that the company’s e-auction sales fell by a third as a result of which prices in the auctions were higher but not enough to offset the decrease in volumes.
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Coal and power minister Piyush Goyal had said that the company’s production would rise by 6% for the current year. However, most of the output will go to coal starved power producers leaving little room for e-auction sales. Broking firm Ambit in its note on the company’s results said that Coal India has already sold around 26 MT in e-auctions in 1HFY15 vs its full-year estimate of around 25 MT in FY15.
Ambit also points out that Coal India’s profit was affected on account of higher tax rates since Eastern Coalfields became a tax-paying entity and higher employee cost was on account of higher bonus outgo which is specific to this quarter and will normalise in the coming quarters.
Despite the poor financial performance Coal India’s stock has not done too bad on the bourses and was trading 1.3% higher since the markets seem to be discounting the future which is expected to be better given a huge supply-demand mismatch. Goyal has even said that the company will double its production to 1 billion tons in the next four year.
Over the past four years, coal-based power plants have increased from 84,198 MW to 1.45 lakh MW but coal output has increased by only 6.1% from 532 MT to 565 MT. Demand was never an issue for Coal India, supply was and continues to be an issue with the company.
However, there have been some interesting developments over the past few months which will augur well for Coal India. First, rather than waiting for railway to provide rakes that can transport its coal, the company has decided to use its cash pile to purchase rakes. The company will utilise Rs 5,000 crore in purchasing 250 rakes. Coal India presently loads around 185 rakes every day. Apart from this, the government is also expediting construction of three railway lines which is expected to increase transportation by 60 MT over the next three years and by 200 MT over five years.
Another interesting development India is that apart from transporting coal through long distances the company is now setting up a 1,600 MW power plant with an outlay of Rs 11,000 crore. By doing this Coal India is not only utilising its cash reserve but also adding another income stream by going in for forward integration as well as consuming its own coal production.
With visibility of sales growth over the next five years, market has taken a drop in its quarterly profit in its stride.