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Coal India: Margins remain depressed - Views on News from Equitymaster
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Coal India: Margins remain depressed
Mar 24, 2015

Coal India has announced the results for the third quarter and first nine months of financial year ended March 2015 (9mFY15). The company has posted a growth of 5% YoY in net sales and fall of 11.2% YoY in net profits for 9mFY15. Here is our analysis of the results.

Performance summary
  • Net sales grow 5% in 9mFY15. This was on the back of 5.1% YoY growth in production and 3.8% YoY higher volume offtake.
  • Operating profits fell by 9.4% YoY in 9mFY15. Operating margins dropped from 22% in 9mFY14 to 19% in 9mFY15, due to lower realisations.
  • Other income fell by 3% YoY.
  • Net profit for 9mFY15 dropped by 11.2% YoY, This was despite lower interest cost and lower tax outgo.

Consolidated financials
(Million tons) 3QFY14 3QFY15  Change 9mFY14 9mFY15  Change
Coal production 118.7 131.6 10.9% 319.2 342.3 7.2%
Offtake 117.2 124.5 6.2% 341.6 354.6 3.8%
(Rs m)
Net sales 169,281 177,628 4.9% 488,120 512,404 5.0%
Expenditure 128,245 142,829 11.4% 379,565 414,099 9.1%
Operating profit (EBDITA) 41,036 34,799 -15.2% 108,555 98,305 -9.4%
EBDITA margin (%) 24% 20%   22% 19%  
Other income 21,826 21,819 0.0% 65,850 63,846 -3.0%
Depreciation 4,417 5,672 28.4% 14,123 16,218 14.8%
Interest 79 11 -86.1% 154 22 -85.7%
Profit before tax 58,366 50,935 -12.7% 160,128 145,911 -8.9%
Exceptional items 111 170   253 (36)  
Tax 19,296 18,130 -6.0% 53,004 51,044 -3.7%
Effective tax rate 37% 31%   37% 31%  
Profit after tax/(loss) 38,959 32,635 -16.2% 106,871 94,903 -11.2%
Net profit margin (%) 23% 18%   22% 19%  
No. of shares (m)         6,316  
Diluted earnings per share (Rs)*         22  
Price to earnings ratio (x)         16.8  
*Based on trailing 12 month earnings

What has driven performance in 3QFY15?
  • While e-auction quantities declined in 9mFY15, the realizations failed to curb the fall in margins for Coal India (CIL). The company had to supply more coal to power plants by cutting down quantities allotted to e-auctions; which fetch better realizations. And even in the fuel supply agreement (FSA) route, CIL reported a drop in coal realization, due to higher sales of low grade coal and more sales to power utilities than to other sectors.

  • The company has approved a roadmap for achieving 1 bn tonne of coal production by 2019-20 along with its subsidiaries. And as per the roadmap, CIL and its subsidiaries are expected to achieve 908.10 MT of coal production in 2019-20.

  • CIL and its subsidiaries plan to invest around Rs 60 bn in FY16 towards capital expenditure. Further, an amount of around 60 bn has been earmarked by CIL for railway and other infrastructure development for FY16. So while volume growth is expected to move upwards it will be a while before realisations show signs of recovery.

  • The latest Mining Bill is also a long term positive for CIL as it will subject the company to competition from the private sector and force it to improve efficiency and coal output quality.
What to expect?
At the current price of Rs 370, the stock is trading at a multiple of 9.3 times our estimated FY17 earnings per share. Coal India is not just one of the biggest and strongest producers of coal globally, the company also has the balance sheet strength to add capacities and improve efficiency. When we evaluate the prospect of PSUs performing better in the years ahead, this company gives us more confidence than any other. With a solid balance sheet, plenty of reserves at its disposal and growing demand for its produce, all Coal India needs to do is to improve its efficiency level. The pressure on realizations may hurt operating margins for a temporary period, but we believe that higher volumes will compensate for the same over time.

An added comfort is the fact that the stock can offer consistent dividend yield of 3.5 to 5% over the next 3 to 5 years, which itself makes it very attractive.

We reiterate our Buy view on the stock.

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