Bearish sentiment towards Coal India could reverse soon

Improving volumes led by power sector demand and better e-auction realisation make stock attractive

Coal India's announcement of an interim dividend of Rs 18.75 per share for FY17 looks surprising if one looks at the stress on the company's performance, and the fact that it has already utilised Rs 3,650 crore of cash to buy back shares in the past few months to reward shareholders. While the two moves may equal the Rs 24.50 per share of dividend for FY16, the company’s consolidated net profit is down 33.6 per cent year-on-year at Rs 6,550 crore in the nine months ended December 2016. And, analysts predict the year to end with profits down 25 per cent. But, a look at the road ahead shows that the company’s prospects are on the mend. And this should lead to improved sentiment for the stock.

Coal demand has been improving after November. The collections of state electricity boards (SEBs), which improved during the note ban, have led to some gains in their financial health. With further initiatives on transmission and distribution reforms and schemes such as UDAY, it will further improve their financial performance leading to higher SEB demand for power. Consequently, Coal India should see more demand for coal.

A few days ago, the company also reported its production and offtake performance for the month of February. Production and offtake have increased by 6.5 per cent and 4.8 per cent year-on-year, respectively, for February. The offtake growth in February has been driven by continued strength in electricity generation, say analysts at J M Financial, pointing to the recovery in thermal power generation with seven per cent year-on-year growth in November’16-January’17. The year-to-date FY17 production/offtake growth now stands at 2.2 per cent and 1.5 per cent, respectively, despite declines seen during the July-November period. 

Analysts also highlight that CEA (Central Electricity Authority) data indicate 13,000-15,000 Mw of annual power generation capacity addition (all coal based) in FY17-19, which can drive 9-10 per cent increase in coal demand. Further, about 50 per cent of FY16 coal imports were to offset domestic coal shortfall, which can now be compensated with the company’s supplies, say analysts. While analysts at J M financial feel that barring near-term weakness, coal demand will grow structurally over the coming years, those at IIFL expect volume growth to improve to six-seven per cent for FY18 and FY19 on the back of a favourable base and pick-up in power demand.

 

The improving prices and volumes in the more-profitable e-auction segment mean further gains. E-auction activity had remained weak in two-three quarters, led by increased coal imports by customers as international coal prices were soft and power demand was also impacted. Nevertheless, e-auction volumes had increased by 66 per cent year-on-year to 25.2 million tonnes in the December quarter and per tonne realisations had recovered to Rs 1,564 from the lows of Rs 1,348 in the September 2016 quarter; though they are yet to catch up with the Rs 1,866 seen in the December'15 quarter. Analysts expect the realisation improvement trend to sustain.

Overall realisations will also get a boost from price hikes taken for FSA (fuel supply agreement; where prices are relatively lower) supplies at the end of May’16, benefits of which had not accrued much looking at subdued power demand and unfavourable coal grade mix. In January this year, the company has taken price hikes for its coking coal supplies too (about 10 per cent of overall output).

The deterioration in performance during the first nine months of FY17 is due to the impact on volumes and also profitability, on account of lower demand for coal from the power sector and lower international coal prices in the initial part of the year. These also impacted sales and profitability of the e-auction segment. Further, the company also started provisioning for wage hikes, which impacted net profit. But, going ahead, all this is changing for the better.