Coal India: Strong outlook

Though volumes may be lower than last year, higher realisations will help revenues and profitability.

The production outlook, regulatory and cash utilisation issues have seen Coal India’s stock price fall about 25 per cent on the bourses over the past three months. The fears turned out to be true as volumes in the September quarter fell short, impacted by the monsoon, leading to a year-to-date production deficit of 26 million tonnes. The company says it will try to cover a part of the shortfall in the second half.

While volumes may remain short of the targeted 452 mt in 2011-12, realisations are expected to remain firm. Costs may see an increase due to wage rises, which are under negotiation. Coal India has started making provisions for higher salaries, though the next round of coal price rise in December or early next year will take into consideration the wage impact. The average price of coal supplied by Coal India is much lower than international prices and rupee depreciation has made imported coal dearer. This leaves headroom for Coal India to raise prices.
 

GAINING ON HIGHER PRICE, BUT MARKET YET TO WARM UP
In Rs crore	Q2’FY12	FY2012E	FY2013E
Net sales	13,148	59,336	64,347
Y-o-Y chg (%)	18.70	12.77	8.44
Ebitda	2,482	17,716	20,680
Ebitda (%)	18.87	29.85	32.13
Net profit	2,593	16,093	18,801
Y-o-Y chg (%)	73.50	48.08	16.83
PE (x)	–

11.66 9.98 E: Estimates                           Source: Capitaline Plus, Bloomberg, analyst reports 

Profitability may further improve, as it plans to switch pricing from the current useful calorific value-based pricing to gross calorific value-based pricing, leading to higher realisations. With all these, in spite of production and sales targets falling short during the current financial year, various analysts see revenue growth of 12-18 per cent and earnings growth of 35-45 per cent during 2011-12. Most analysts remain positive on the stock, with a one-year consensus price target of Rs 395.

On the flip side, the market is worried about  cash deployment as the company is sitting on reserves of Rs 54,980 crore as of September 2011. While analysts say that a good dividend payout may be a positive, any attempt by the government to get the company to buy stocks of other PSUs to achieve its divestment objective can have an adverse impact on the scrip.  

Q2 VOLUMES LOWER, REALISATIONS UP
The September quarter is seasonally weak due to the monsoon and the company was hit harder this time, with production declining 11.3 per cent year-on-year (y-o-y) and 16.6 per cent sequentially to 80.3 mt. Sales volumes declined 12 per cent sequentially and five per cent y-o-y. However, blended realisations at Rs 1,403 a tonne, up 2.8 per cent sequentially, brought some solace. On a yearly basis, blended realisations increased a phenomenal 25 per cent, which helped Coal India achieve revenue growth of 18 per cent y-o-y. On a sequential basis, though, sales fell 9.3 per cent.

The company made a provision of Rs 750 crore in the second quarter for wage rises, even as the management has not closed negotiations. Also, in spite of higher miscellaneous expenses, rising power and fuel costs and an increase in social overhead costs, operating profit per tonne came at Rs 264 during Q2, compared with Rs 199 a year earlier. A 69 per cent y-o-y increase in other income to Rs 1,794 crore helped the net profit grow 67 per cent to Rs 2,593 crore.

PROSPECTS, OUTLOOK
After the second quarter shortfall, analysts have cut FY12 volume estimates by six to 10 per cent, though the production and sales run rate picked up in October. On the positive side, availability of railway wagons is no longer a constraint. In the September quarter, 147 rakes per day were utilised, which increased to 168 a day in October and will go up to 178 in November, according to Edelweiss Securities. However, BofA Merrill Lynch analysts see rakes becoming a problem once again in the March 2012 quarter, when the requirement increases to 200 rakes a day after production ramp-up. Reports also indicate no likelihood of any decline in e-auction volumes or prices. While Coal India offered four mt for e-auctions to the power sector in October, only 0.3 mt was absorbed by power companies due to logistics constraints.

With the change in pricing, realisations are likely to see a boost, though the management has not quantified the extent. It has already moved to gross calorific value-based pricing for the superior quality A and B grades and the switch for the remaining grades would be done in 2012.

If the company is allocated the new coal blocks it has been demanding for two years,or if it gets environmental go ahead on existing  blocks, production prospects for the next financial year may improve further. Analysts feel there should be more regulatory clearances and allotments, since the environment ministry has softened its stand in the past few months. With the overall outlook turning positive, analysts are turning positive on the stock. According to Bloomberg data, 70 per cent of analysts have a ‘buy’ rating on the stock.