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Coal India: Disappointing start to the year - Views on News from Equitymaster
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Coal India: Disappointing start to the year
Aug 5, 2013

Coal India has announced the consolidated results for the quarter ended June 2013. The company has posted de-growth of 0.2% YoY in net sales and 16.5% YoY decline in net profits respectively for the quarter ended June 2013. Here is our analysis of the results.

Performance summary
  • Net sales declined by 0.2% YoY during 1QFY14. This was on the back of lower realisations.
  • Operating profits declined by 17.8% YoY. Operating margins decreased by 4.2% YoY and stood at 4% in 1QFY14 as compared to 19.2% in 1QFY13.
  • Other income increased by 7.2% YoY.
  • Net profit for the quarter ended June 2013, decreased by 16.5% YoY. This was due to lower realisations and higher cost. Net profit margins declined by 4.5% YoY.
Consolidated financial summary
(Million tons) 1QFY13 1QFY14 Change
Coal production 102.5 102.9 0.4%
Offtake 113.0 115.4 2.1%
(Rs m)      
Net sales 165,006 164,724 -0.2%
Expenditure 116,860 125,145 7.1%
Operating profit (EBDITA) 48,146 39,580 -17.8%
EBDITA margin (%) 29.2% 24.0%  
Other income 20714 22196 7.2%
Depreciation 5356 4757 -11.2%
Interest 126 74 -41.0%
Profit before tax 63378 56945 -10.2%
Exceptional items 103 50  
Tax 18582 19585 5.4%
Effective tax rate 37.0% 31.0%  
Profit after tax/(loss) 44693 37310 -16.5%
Net profit margin (%) 27.1% 22.6%  
No. of shares (m)   6,316  
Diluted earnings per share (Rs)*   15.5  
Price to earnings ratio (x)   16.1  
(*On a trailing 12-month basis)

What has driven performance in 1QFY14?
  • Coal India (CIL) reported a 0.2% YoY decrease in net sales. Despite 2.1% growth in volumes, revenues fell 0.2% YoY due to 2.3% drop in realizations which stood at Rs 1,432 per tonne. FSA realisations rose 2.3% YoY at Rs 1296. E-auction realisations dropped 16.5% YoY (7.3% QoQ) at Rs 2,140/t, while E-auction volumes fell marginally by 1.8% at 13.2 m tonnes. Washed coal realisations dropped 8.5% YoY (6.5% QoQ) at Rs 2,117/t. QoQ volatility in E-Auction prices has been historically high and thus current prices are unlikely to be the benchmark for the rest of the year.

  • At the operating level, operating profits of the company declined by 17.8% YoY. Operating margins of the company declined by 4.2% YoY. This was due to surge in operating cost like contractual expenses pertaining to diesel & labor which jumped 20% YoY. The major surprise came in the employee cost which inched higher 11% at Rs 68 bn YoY as company has provided for Diwali bonus to employees in 1QFY14 (Rs 26,500/employee vs 16,500/ employee in 1QFY13) amounting to Rs 3.5 bn.

  • Net profit edged lower at Rs37.3 bn down 17% YoY on account of muted revenue followed by higher operating expenses and higher tax out go (Tax rate in Q1FY14 at 34.4% vs 29.3% in Q1FY13).
What to expect?
The stock has corrected 18% over the last three months due to a) overhang of OFS (offer for sale) b) significant decline in earnings trajectory on account of cost pressure, lower market linked realisation c) risk to dispatch growth as four months dispatch volume (April -July 2013) stays below target level. However if we analyse these three concerns we see that OFS concern largely a short term technical overhang till the government dilutes its stake in the company. On the cost front the increase by way of higher fuel price and employee compensation related provisioning, has largely been factored in this quarter. Lastly though the price realisation has stayed subdued during the quarter we see the trend improving as CIL's 28th May, 2013, 5% blended price hike will get fully reflected in the subsequent quarters.

At the current price of Rs 252, the stock is trading at a multiple of 2.7 times our estimated FY16 book value. We maintain our Buy view on the stock. However, given the risks, please ensure that the stock does not form more than 3% of your portfolio.

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.

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