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Coal India: Margin blip mars the show - Views on News from Equitymaster
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Coal India: Margin blip mars the show
Jul 15, 2015

Coal India has announced the results for the fourth quarter and financial year ended March 2015 (FY15). The company has posted a growth of 4.7% YoY in net sales and fall of 9.2% YoY in net profits for FY15. Here is our analysis of the results.

Performance summary
  • Net sales grow 4.7% in FY15. This was on the back of 6.9% YoY growth in production and 3.8% YoY higher volume offtake.
  • Operating profits fell by 4.6% YoY in FY15. Operating margins dropped from 23% in FY14 to 21% in FY15, due to lower realisations.
  • Other income fell by 3.3% YoY.
  • Net profit for 9mFY15 dropped by 9.2% YoY.
  • The board declared dividend of Rs 20.7 (dividend yield 5%) for FY15.

Consolidated performance
(Million tons) 4QFY14 4QFY15 Change FY14 FY15 Change
Coal production 143.2 151.8 6.0% 462.4 494.2 6.9%
Offtake 129.9 134.7 3.7% 471.5 489.3 3.8%
(Rs m)
Net sales 199,979 207,742 3.9% 688,100 720,146 4.7%
Expenditure 148,904 153,751 3.3% 528,468 567,846 7.5%
Operating profit (EBDITA) 51,075 53,991 5.7% 159,632 152,300 -4.6%
EBDITA margin (%) 26% 26%   23% 21%  
Other income 23,843 22,914 -3.9% 89,693 86,760 -3.3%
Depreciation  5,840 6,976 19.5% 19,964 23,198 16.2%
Interest - - 0.0% - -  
Profit before tax 69,078 69,929 1.2% 229,361 215,862 -5.9%
Exceptional items 63 16   566 23  
Tax 24,674 27,528 11.6% 77,679 78,573 1.2%
Effective tax rate 36% 39%   34% 36%  
Profit after tax/(loss) 44,341 42,385 -4.4% 151,116 137,266 -9.2%
Net profit margin (%) 22% 20%   22% 19%  
No. of shares (m)         6,316  
Diluted earnings per share (Rs)*         21.7  
Price to earnings ratio (x)         20.0  
*Based on trailing 12 month earnings

What has driven performance in FY15?
  • Although the last quarter recouped most of the volumes lost in the initial half of FY15, lower realization took the sheen off the performance of Coal India. While e-auction quantities declined in FY15, 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 Mining Bill is expected to be 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 434, 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 will wear off once higher volumes start compensating for the same. The fact that CIL remains a strong dividend stock is an additional upside for investors.

The stock has gone up by almost 14% since we recommended buy in June 2014. Given the upside along with the dividend yield, we reiterate our Buy view on the stock.

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