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Coal India: FY14 marked by poor operating performance - Views on News from Equitymaster

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  • Jun 9, 2014 - Coal India: FY14 marked by poor operating performance

Coal India: FY14 marked by poor operating performance
Jun 9, 2014

Coal India has announced the results for the quarter and fiscal ended March 2014 (FY14). The company has posted a growth of 0.7% YoY in net sales and decline of 12.9% YoY in net profits for FY14. Here is our analysis of the results.

Performance summary
  • Net sales remain flat (up 0.7% YoY) in FY14. This was on the back of just 2.3% YoY growth in production and 1.4% YoY higher volume offtake.
  • Operating profits declined by 11.7% YoY. Operating margins decreased by 3% YoY and stood at 23% in FY14 as compared to 26% in FY13.
  • Other income was up 2.5% YoY.
  • Net profit for the fiscal, decreased by 12.9% YoY. This was due to production disruptions, lower e-auction realisations and higher cost. Net profit margins declined by 3% YoY.
  • The company had declared an interim dividend of Rs 29 per share in January 2014.

Consolidated operating performance
(Milliontons) 4QFY13  4QFY14  Change FY13 FY14 Change
Coal production 143.3 143.2 -0.1% 452.2 462.4 2.3%
Offtake 129.9 129.9 0.0% 465.1 471.5 1.4%
(Rs m)
Net sales 199,045 199,979 0.5% 683,027 688,100 0.7%
Expenditure 137,855 149,104 8.2% 502,191 528,468 5.2%
Operating profit (EBDITA) 61,190 50,875 -16.9% 180,836 159,632 -11.7%
EBDITA margin (%) 31% 25%   26% 23%  
Other income 22,065 23,843 8.1% 87,466 89,693 2.5%
Depreciation 4,697 5,640 20.1% 18,129 19,964 10.1%
Interest 127 329 159.1% 451 580 28.6%
Profit before tax 78,431 68,749 -12.3% 249,722 228,781 -8.4%
Exceptional items - -   - -  
Tax 24,507 24,674 0.7% 76,226 77,679 1.9%
Effective tax rate 37% 31%   37% 31%  
Profit after tax/(loss) 53,924 44,075 -18.3% 173,496 151,102 -12.9%
Net profit margin (%) 27% 22%   25% 22%  
No. of shares (m)         6,316.3  
Diluted earnings per share (Rs)*         23.9  
Price to earnings ratio (x)         16.4  
(*On a trailing 12-month basis)

What has driven performance in FY14?
  • Coal India (CIL) missed the production target of 482 million tonnes for FY14 (actual production 4% lower at 462 million tonnes). In FY13 too, the company had produced 452.5 million tonnes of coal, short of the 464 MT target. The company's net sales remained flat on YoY basis. Besides the production disruption due to employee strike in March 2014, the production also suffered in October 2013 due to cyclone Phailin, which affected the key coal producing states of Odisha, Jharkhand and West Bengal.

  • The impact of lower volumes on topline was aggravated by 0.6% YoY fall in blended realisations. E-auction volumes were marginally up in FY14 but the realisations fell 14.2% YoY. FSA (fuel supply agreement) volume was up 1.5% YoY, while realisation was up 2.3% YoY.

  • At the operating level, Coal India reported 11.7% decline in operating profit for FY14 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 FY14 shrunk by 3% YoY to 23.2%. Operating costs per ton of coal increased 2.9% YoY to Rs 1,143/tonne on account of high diesel prices and power & fuel costs. Employee welfare expenses were also up 18% YoY. Contractual expenses increased by 17.6% YoY due to higher diesel costs and an increase in contract prices. EBIDTA/tonne for FY14 was Rs 338, lower by 12.9% YoY.

  • Net profit edged lower by 12.9% YoY on account of muted revenue growth and higher interest outgo followed by marginal rise in other income.
What to expect?
FY14 remained a year of poor operating performance both in term of volume and realization for CIL. The company missed our profit estimate for FY14 by 6.5%.

CIL's production target for FY15 has been set at 507 MT, while the overall offtake target is 520 MT. Faster environmental clearances and reforms for the power sector are expected to bode well for CIL in FY15. 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 recent price hikes indicate 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. Moreover the government is also contemplating on breaking up CIL into several smaller entities to ensure better efficiency.

At the current price of Rs 392, the stock is trading at a multiple of 11.2 times our estimated FY16 earnings per share. The stock price has gone up by over 60% in the past two months. While our estimates do warrant a revision, we recommend investors to not buy more of the stock at current levels.

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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