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Coal India surprised most analysts with robust quarterly results. It reported 35 per cent year-on-year growth in net profit at Rs 5,414 crore for the quarter ended March, far ahead of analysts’ expectations of five to six per cent increase in net profit. This is also reflected in its share price, which was up three per cent in Tuesday’s trade. Importantly, even at the current price of Rs 323, most analysts believe there is good value in the stock.
“The stock at current price is available at an attractive dividend yield of 4.5 per cent. During FY13, it has paid a total dividend of Rs 14 a share (of which Rs 4.30 announced on May 20 is yet to be paid out) which may increase further keeping in mind its huge cash flows and low capex requirement. The stock is attractive from the point of dividend yield and cheap valuation,” said Ashish Kejriwal, who tracks the company at Elara Capital. Based on FY14 estimates, the stock is currently trading at 9.6 times earnings and 5.6 times enterprise value to operating profits.
Interestingly, analysts believe that dividend payouts could go up further. “With a cash balance of $11.5 billion (Rs 63,000 crore) at end-FY13, we expect CIL to increase its dividend payout in the next two years, translating into yield of 8.2 per cent in FY14 and 9.4 per cent in FY15,” said Vipul Prasad of Morgan Stanley in a note.
Surprisingly, the gains in profitability came on account of lower cost leading to substantial improvement in operating profit. During the quarter, operating profit jumped 60.7 per cent to Rs 6,120 crore, which was ahead of estimates. Helped by an over 50 per cent fall in overburden removal expenditure to about Rs 900 crore as well as fall in employee costs (year-ago period had seen costs rise on account of wage settlement), total expenses fell 11 per cent leading to significant improvement in the operating margins to 30.7 per cent as against 19.6 per cent in the year-ago period. This could also be attributed to the fact that the company’s production during the quarter fell a marginal 0.9 per cent to 143 million tonnes (mt) whereas coal offtake grew almost six per cent to 130 mt (helped by inventor sales), thus helping Coal India to report lower cost on higher sales.
These are more of one-time gains and hence, the high margins seen in the March quarter might not be sustained. Over the next two years, it is expected that the company will earn operating profit margins in the region of 27-28 per cent as in FY13.
The road ahead
The key issues for Coal India are production volumes and hike in prices, so that it can grow its earnings further. “We believe a trigger for CIL will be ramp-up of coal production and pricing action; any visibility on these fronts will be a key monitorable,” said Abhishek Anand of JM Financials in a note.
While there are unresolved issues regarding incremental coal supplies, coal price-pooling and quality as well as the overhang about the looming stake sale by the government, the downside for the stock looks limited given its underperformance (down 14.5 per cent versus Sensex’s 4.6 per cent rise in last six months). While concerns are largely discounted, valuations are attractive.
In a post-results note, Kotak Securities’ analysts say, “Even as the Street ignores the valuations of CIL on account of the potential share sale, we highlight that the original issue price (Rs 245 per share) plus incremental cash balance (Rs 65 per share) is almost equivalent to the CMP (Rs 315), setting a possible base minimum price for any incremental share sale given the 19 per cent CAGR in earnings.” The analyst has marginally revised earnings and target price (Rs 410 compared to Rs 404 previously).
