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Coal India: Tempered volumes hurt profits

Feb 26, 2014

Coal India has announced the consolidated results for the quarter ended December 2013. The company has posted a decline of 2.3% YoY in net sales and 11.4% YoY decline in net profits respectively for the quarter ended December 2013. Here is our analysis of the results.

Performance summary
  • Net sales declined by 2.3% YoY during 3QFY14. This was on the back of lower sales volumes.
  • Operating profits declined by 4.3% YoY. Operating margins decreased by 1% YoY and stood at 24% in 3QFY14 as compared to 25% in 3QFY13.
  • Other income declined by 7.5% YoY.
  • Net profit for the quarter ended December 2013, decreased by 11.4% YoY. This was due to lower realisations and higher cost. Net profit margins declined by 2% YoY.
  • For the nine month ended December 2013, net sales increased by 0.9% YoY and net profits declined by 10.6% YoY.
  • The company has declared an interim dividend of Rs 29 per share.

Consolidated operating and financial performance
(Million tons) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Coal production 117.4 118.7 1.1% 308.9 319.2 3.3%
Offtake 120.5 117.2 -2.7% 335.2 341.6 1.9%
(Rs m)
Net sales 173,250 169,281 -2.3% 483,982 488,120 0.9%
Expenditure 130,368 128,245 -1.6% 364,336 379,565 4.2%
Operating profit (EBDITA) 42,883 41,036 -4.3% 119,646 108,556 -9.3%
EBDITA margin (%) 25% 24%   25% 22%  
Other income 23605 21826 -7.5% 65,402 65,850 0.7%
Depreciation 4204 4417 5.1% 13,432 14,123 5.1%
Interest 96 96 0.4% 325 250 -22.8%
Profit before tax 62188 58349 -6.2% 171,291 160,032 -6.6%
Exceptional items -151 111   148 253  
Tax 18387 19297 4.9% 51,719 53,005 2.5%
Effective tax rate 37% 31%   37% 31%  
Profit after tax/(loss) 43951 38941 -11.4% 119,425 106,775 -10.6%
Net profit margin (%) 25% 23%   25% 22%  
No. of shares (m)         6,316  
Diluted earnings per share (Rs)*         25.5  
Price to earnings ratio (x)         10.3  
(*On a trailing 12-month basis)

What has driven performance in 3QFY14?
  • Coal India (CIL) reported a 2.3% YoY decrease in net sales. The impact of lower volumes on topline was some-what offset by an increase in blended realizations. Average realizations for the company increased by 0.5% YoY to Rs 1,444/t due to a 3.8% YoY increase in FSA prices. E-auction realisation fell 10% YoY at Rs 2,220/t following lower demand, but up 4% QoQ. E-auction volume jumped 25% YoY and fell just 3% sequentially, which resulted in its share rising from 10.6% in 2QFY14 and 11.9% in 1QFY14 to 12.3% for the quarter. FSA volume jumped 5% YoY, while it was down 6% QoQ.

  • Coal offtake was lower by 2.7% YoY to 117 m tons as transportation was impacted by the Cyclone Phalin. Production growth during the quarter was restricted at 1.1% YoY to 117.2 m tons. Offtake for the quarter was 4.7% lower than the company's target and that of production was lower by 3.9%.

  • At the operating level, Coal India reported a 4.3% decline in operating profit largely on account of lower volumes and an increase in diesel prices. Operating profit was further impacted by a jump in contractual expenses. Operating margins for the quarter shrunk by 51 bps YoY to 24.2%. Operating costs per ton of coal increased 1.1% YoY to Rs 1,094/t on account of high diesel prices and power & fuel costs. Stores and spares costs jumped 13.7% YoY. The management said that stores & spares costs would remain around current levels. Contractual expenses too increased by 21.3% YoY due to higher diesel costs and an increase in contract prices. EBIDTA/ton for the quarter was Rs 350/t, lower by 1.6% YoY.

  • Net profit edged lower at Rs 38.9 bn down 11.4% YoY on account of muted revenue followed by higher operating expenses.
What to expect?
The overhang of Government's Follow on Public Offer (FPO), the Presidential directive to sign FSAs with power producers and lower market linked prices have resulted in Coal India underperforming the indices over the last one year. The special dividend offered by the company however improved sentiments . Realisations under e-auction sales and washed coal sales are near their bottom, and any increase in global coal prices would lead to higher realisations for CIL. The price hikes indicates the company's ability to pass on the increased costs to maintain profitability. Earnings are expected to improve FY15 onwards on the back of higher volumes, marginal increase in e-auction prices and price hikes taken by the company during the year.

At the current price of Rs 263, the stock is trading at a multiple of 10.3 times its TTM P/E on a consolidated basis. We reiterate our Buy rating on the stock due to a high dividend yield of 7% and cheap valuations.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio

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