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After hitting a life-time low of Rs 248 on Monday, the Coal India stock bounced back. But the pressure may not fade soon. The government’s plan to divest its stake in the company remains a big overhang on the stock. Further, at a time when global coal prices are under pressure, the share of e-auction volumes that typically fetch better realisations, too, are down. A majority of coal supplies are being directed to the power sector under the fuel supply agreement (FSA) and are impacting profitability. Coal India, thus, reported its first-ever year-on-year fall in net profit (after listing); these were down 16.6 per cent to Rs 3,734 crore for the June quarter.
While the coal prices are likely to remain subdued, benefits of price rises undertaken by Coal India in May-end may bring respite. However, e-auction volumes have to substantially increase, only possible with a substantial ramp-up in coal production.
Against this backdrop, the stock may continue on its roller-coaster ride. Looking at the sharp share price correction and attractive valuations, analysts maintain a positive stance. However, most have cut target prices with the consensus being Rs 356, according to Bloomberg. At Rs 263, the one-year forward price-to-earnings works out to nine times, while the dividend yield is 5.5 per cent.
Lower realisations
The impact of lower realisations was visible on revenues during the June quarter. With lower global prices, Coal India’s per tonne e-auctions realisations, too, came lower at Rs 2,140 compared to Rs 2,561 a year ago. The overall blended realisations, however, were down sharply to Rs 1,430 due to higher supplies of coal under fuel supply agreements (FSAs) that fetched realisations of only Rs 1,236 a tonne. Hence, in spite of the company’s coal sales coming at 115.4 million tonnes (mt) and growing 2.1 per cent year-on-year, revenues declined 0.2 per cent to Rs 16,472 crore for the quarter.
Pricing unlikely to improve
Coal prices are likely to remain subdued in the interim on weak demand from China and Europe. With coal prices remaining soft in June, low-grade Indonesian thermal coal prices declined further by two per cent during July. Analysts at Religare expect prices to remain range-bound in August, too. Thus, not much respite on realisations may be expected during the September 2013 quarter (in September 2012 quarter, blended realisations stood at Rs 1,435 a tonne).
Secondly, Coal India signed only 82 FSAs for 34,793 Mw of power capacity till end-July 2013, compared with 131 FSAs for 60,798-Mw capacity in 2012. However, Coal India is now being asked to sign more FSAs. The coal ministry recently issued another Presidential directive for FSAs in July for an additional 18,000 Mw of power plants coming up by March 2015. This could prove to be another drag on the company, as e-auction volumes that fetch better realisations may go down further.
While realisations have been weak, rising employee and diesel costs have put stress on Coal India’s margins. The Ebidta margins declined from 29.2 per cent in June 2012 quarter and 30.7 per cent in March 2013 quarter and further to 24 per cent in June 2013 quarter. As realisations remain under pressure and supplies to the power sector seen rising, the margins are likely to remain under stress, at least till e-auction volumes increase drastically.
The encouragement comes from July production and dispatch numbers. The April-July production at 135.67 mt is just half a million tonne short of the targeted production for the four months. Higher off-take of 38.22 mt versus targeted 36.07 mt in July takes the overall off-take to 153.35 mt to April-July period.
However, analysts are a bit sceptical. Although the company has targeted 492 mt of sales in FY14, Abhisar Jain of Centrum Broking sees the firm achieving only 480 mt.
