Dividend a sentiment-positive for Coal India but concerns remain

Weak volume growth likely to put pressure on more profitable e-auction segment

Coal India has rebounded more than 5 per cent from its lows, seen at start of the month. Though this has been helped by a strong interim dividend of Rs 7.25 a share, concerns on fundamentals remain. 

While softening international coal prices could put pressure on more profitable e-auction premiums, tepid volume growth could weigh on e-auction volumes. 

Coal India had reported sales volume growth of 6.5 per cent during the April to November period. Despite severe shortage of coal, analysts expect growth in the August-December period to be a mere 1 per cent, led by improved demand from the power sector and pick-up in economic activity. Overall volume growth will remain weak for the rest of FY19 and in FY20, due to poor rail connectivity at newly commissioned mines and the peaking out of current road/belt routes, say analysts at Prabhudas Lilladher. 

They now factor in just 4.8 per cent and 5.5 per cent growth in FY19 and FY20, respectively. 

Since the major part of coal supplies are tied up in power and non-power fuel supply agreements, the muted volume growth means there will be lower coal available for e-auctions. 

Any decline in e-auction volumes could risk the firm’s revenue growth and profitability. The profitability could be hit further if lower international prices pull down e-auction premiums. 

E-auction realisations rising 61 per cent year-on-year (YoY) and 8 per cent sequentially to Rs 2,592 during the September quarter had helped blended realisations grow 13.5 per cent YoY to Rs 1,508 per tonne for the firm. 

 

A hefty dividend is positive for the stock, with analysts at Morgan Stanley pegging the same at Rs 20 a share during FY19 (total dividends of Rs 16.5 a share in FY18 and Rs 19.9 a share in FY17). 

Earnings will grow strongly in FY19, driven by the January 2018 price hike and evacuation levy, but concerns remain over profit growth thereafter. 

Analysts at HDFC Securities believe Coal India’s business leaves barely enough cash flow after paying for capex and dividends, and the grim reality is that it serves the mission to supply coal at low prices to India’s power sector, with little regard for profits. 

Driven by the cut in overall volume growth and e-auction volume estimates, Prabhudas Lilladher analysts have cut their earnings estimates by 7-10 per cent for FY19 and FY20.