Coal India: Price hikes, evacuation charge likely to mitigate higher costs

The Street’s confidence on Coal India is improving, as indicated by recent analyst upgrades and gains on the bourses. With the impact now behind it of slippage in coal grades and wage hike provisioning, which weighed on the performance in FY18, the price hikes taken in January should take care of higher wage costs.

The improved volume outlook and better e-auction prices for its coal are likely to drive earnings in FY19. And, are keeping analysts positive on the stock, trading at a reasonable valuation. Analysts at Jefferies, after the strong March quarter (Q4) results, have raised their FY19-20 earnings estimate by 15 per cent and 14 per cent, respectively. They feel the strong power sector realisations seen in Q4 should sustain, while e-auction prices have edged higher since March. As a result, the stock has gained almost five per cent in the previous two trading sessions to Rs 294.5, after underperforming in the past five months. Analysts feel there are more gains ahead, with some even believing it could be at a turning point. 

The better than estimated Q4 net sales growth of 12 per cent year-on-year and 21 per cent sequentially to Rs 251 billion was impressive, driven by improving realisation and volume. More important, the realisation trend remains healthy. The company’s blended prices improved 4.7 per cent over a year during Q4 and were much better than the trend in the first nine months of 2017-18. Sales volume growth of 4.8 per cent from a year before has further boosted revenue. For coal supplied under fuel supply agreements (FSAs), sold at notified prices that are typically lower than market prices, the realisation improved 2.3 per cent in Q4. After a decline in the first nine months of 2017-18, this was a surprise. 

A bigger boost came from a strong 31 per cent year-on-year improvement in e-auction prices. Analysts highlight that the e-auction premium surging to 75 per cent (highest since the third quarter of FY15), led by strong demand from the non-power sector, is a big positive. The prices, up six per cent sequentially at Rs 2,110 a tonne, have increased further since.

Tight e-auction supplies due to diversion of coal to power utilities and pick-up in demand from end-use sectors (cement and others) should support these prices further, say analysts. Those at Kotak Institutional Equities expect further improvement in realisation during FY19, on the back of the full benefit from introduction of an evacuation facility charge, as well as revision in the notified prices of coal.

The company achieved 6.8 per cent volume growth in FY18 to 580.29 million tonnes and is targeting 650 mt for FY19. Expected to be driven by healthy demand from the power sector, as well as from non-power users. Although analyst estimates are expecting only about 620 mt of volumes, keeping in mind railway wagon availability and other issues, they still see a stronger upside in profitability. Analysts at IIFL say evacuation charges and price hikes would add Rs 89 billion to revenue. This is in addition to volume growth.

Employee costs would also be lower on a year-on-year basis, as the company will not have any one-offs and prior period items (about Rs 80 bn) as seen in FY18. IIFL believes these factors would lead to operating profit more than doubling in FY19.

Analysts at Jefferies, too, have raised their FY19-20 estimates for Ebitda (earnings before interest, tax, depreciation and amortisation), after factoring in higher FSA realisation and e-auction prices. They expect earnings to grow 20 per cent annually over FY18-20. IIFL, which issued a ‘buy’ recommendation (titled ‘At inflexion point’) on Coal India, believes most of the negatives are already built into the stock. And, that the valuation of 5.3 times the FY20 enterprise value to Ebitda estimate, is attractive. The target price estimate for the stock of IIFL, Edelweiss, Kotak and Jefferies of Rs 325-369 is 10-25 per cent higher from the current level.