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Coal India: Bleak future clouds good numbers

Feb 17, 2012

Coal India has declared the results for the third quarter and first nine months of financial year 2011-12 (9mFY12) results. The company has reported 22% YoY growth in consolidated net sales while net profits have grown by 62% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 22% YoY during 9mFY12 despite 3% YoY fall in production and offtake volumes remaining flat. There was 5% increase in availability of railway rakes in 3QFY12.
  • Operating margins improve to 28% from 24% in 9mFY11. This is largely on account of higher realizations and despite rise in employee costs.
  • In addition to stronger operating margins, higher other income and lower interest costs boosted the net profit margins.
  • Government has asked Coal India to sign up 20-year fuel supply agreements (FSAs) for upto 50,000 MW of private sector power plants. Coal India will be rewarded if it meets 90% of its FSA commitments and penalised if it falls below 80%.

Consolidated operating and financial performance
(Million tons) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Coal production 113.7 114.6 0.8% 299.5 291.2 -2.8%
Offtake 110.4 110.3 -0.1% 310.4 310.2 -0.1%
(Rs m)            
Net sales 126,867 153,492 21.0% 352,246 429,964 22.1%
Expenditure 92,877 108,072 16.4% 267,634 311,284 16.3%
Operating profit (EBDITA) 33,990 45,420 33.6% 84,612 118,680 40.3%
EBDITA margin (%) 26.8% 29.6%   24.0% 27.6%  
Other income 12,506 18,558 48.4% 33,910 52,089 53.6%
Depreciation 4,310 5,256 21.9% 12,459 15,588 25.1%
Interest 78 76 -2.6% 205 213 3.9%
Profit before tax 42,108 58,646 39.3% 105,858 154,968 46.4%
Exceptional items (123) 52   (737) 275  
Tax 15,769 18,321 16.2% 38,706 47,569 22.9%
Effective tax rate 37% 31%   37% 31%  
Profit after tax/(loss) 26,216 40,377 54.0% 66,415 107,674 62.1%
Net profit margin (%) 20.7% 26.3%   18.9% 25.0%  
No. of shares (m)         6,316.3  
Diluted earnings per share (Rs)*         23.7  
Price to earnings ratio (x)         13.5  
(*On a trailing 12-month basis)

What has driven performance in 9mFY12?
  • With the availability of increased railway rakes and higher pricing, Coal India (CIL) grew its sales by 22% YoY during 9mFY12 despite 3% YoY fall in production and negligible change in offtake volumes. The management attributed the drop in production to extended monsoon in the mining areas. The company benefited from the price increase in some grades of coal as well as nearly 100% higher realizations for coal sold via e-auction. Coal India's consolidated operating margins improved to 28% in 9mFY12 from 24% in 9mFY11, largely on account of better pricing.

  • Shortage of railway rakes had impacted the transport of coal in first nine months of FY12. The Indian Railways is the largest transporter CIL’s coal produce was accounted for around 51% of its total offtake in FY11. The Railways have now geared up capacity by investing in more number of railways rakes to ensure better coal offtake in FY13.

  • The higher realizations are thanks to the company's strategy to sell at least 10% of its total production through the e-auction route. Reason being e-auction of coal fetched it prices that were 63%, 81% and 100% higher than normal prices in FY10, FY11 and 1HFY12 respectively. But the catch here is that the consistent rise in e-auction prices is unsustainable. The e-auction prices are linked to the international prices which have shown a downward trend over the past few months. Hence, CIL's sales growth prospects from hereon will largely remain limited to the growth in volumes. In addition, pressures of rise in employee costs may take a toll on margins. Further, if and when the new mining bill gets introduced, the company will have to pay royalty of around 5% on sale price at pit mouth.

  • As we cited in our recommendation on the company, the prospects for improvements of the fundamentals of Coal India are solely dependent on improvement in efficiency levels, if any. Given the importance of cheap power for the growth of the economy, Coal India is unlikely to be able to exercise its pricing power for the fuel from power generation companies. On the contrary as per the government’s latest dictate it may have to bear heavy penalty for its inefficiencies. That the onus of importing power in case of supply deficit is also on Coal India will mean that the company will have to bear the risk of rise in coal of imported coal, if any.

What to expect?
At the current price of Rs 300, the stock is trading at a multiple of 3.4 times our estimated FY14 book value. During the current fiscal (FY12) CIL is likely to miss its targeted coal production of 852 m tons and offtake of coal of 454 m tons. For FY13 the production target is expected to be around 464 m tons. CIL has targeted a production of 560 m tons by FY17E implying a growth of 25% from current levels of production. We believe that at the current valuations the upsides in the stock are limited over the next 2 years.

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