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Coal India: A good start to the year

Aug 22, 2012

Coal India has announced the consolidated results for the quarter ended June 2012. The company has posted a growth of 13.8% YoY and 7.9% YoY in net sales and net profits respectively for the quarter ended June 2012. Here is our analysis of the results.

Performance summary
  • Net sales grew by 13.8% YoY during 1QFY13. This was on the back of higher realisations and higher offtake volume.
  • Operating profits remained flat during the quarter ended June 2012. This was due to lower employee and overburden cost.
  • Other income increased by 32.2% YoY on account of higher cash balance and increased treasury yield.
  • Net profit for the quarter ended June 2012, increased by 7.9% YoY. However net profit margins saw a decline of 1.5% YoY.

Consolidated operating and financial performance
(Million tons) 1QFY12 1QFY13 Change
Coal production 98.3 102.5 4.2%
Offtake 106.3 113.0 6.4%
(Rs m)
Net sales 144,991 165,006 13.8%
Expenditure 96,829 116,860 20.7%
Operating profit (EBDITA) 48,162 48,146 0.0%
EBDITA margin (%) 33.2% 29.2%  
Other income 15,666 20,714 32.2%
Depreciation 4,308 5,356 24.3%
Interest 97 126 29.8%
Profit before tax 59,423 63,378 6.7%
Exceptional items (132) 103  
Tax 18,115 18,582 2.6%
Effective tax rate 37% 31%  
Profit after tax/(loss) 41,439 44,693 7.9%
Net profit margin (%) 28.6% 27.1%  
No. of shares (m)   6,316.3  
Diluted earnings per share (Rs)*   13.3  
Price to earnings ratio (x)   26.3  
(*On a trailing 12-month basis)

What has driven performance in 1QFY13?
  • Coal India (CIL) reported a 13.8% YoY increase in net sales. Realizations were down sequentially by 7.7% due to the fall in realizations across the FSA and E-Auction coal channels by 6% and 10% QoQ respectively. Volume share of E-Auction and Washed coal fell by 0.8% each to 12% and 2.9% respectively. E-auction revenues stood at Rs 34.5 bn (20% of sales), while volumes stood at 13.5 m tons, translating into average realization of Rs 2,562 per ton. Similarly, Washed coal revenues stood at Rs 10.2 bn (6.2% of sales), while volumes stood at 4.22 m tons, translating into realization of Rs 2,412 per ton. FSA realization for 1QFY13 stood at Rs 1,261 per ton as against Rs 1,188 per ton in YoY.

  • At the operating level, operating profits of the company remained flat. This was due to lower employee cost which declined by 25.8% YoY. However operating margins of the company declined by 3% YoY. This is because the benefit of low employee cost was partly negated by higher cost of inventory and increase in other expenditure. Net profit for the quarter ended June 2012, increased by 7.9% YoY. However net profit margins saw a decline of 1.5% YoY. The increase in net profit was led by 33% YoY, increase in other income. The increase in other income is primarily due to higher interest rates and higher cash balance.

  • During the quarter production and offtake for the company stood at 102 m tonnes (up 6.4% YoY) and 113 m tonnes (up 6.4% YoY). In 1QFY13, the dispatches through rail has been higher by 11% YoY, as rakes availability improved to 177 rakes per day as against 164 rakes per day YoY. Also, the July 2012 month production and dispatch have been at 31.8 and 36.2 m tons and Coal India targets production and dispatches of 96 and 107 m tons during 2QFY13.

  • Dispatch to the power sector rose 8% YoY to 81m ton, meeting 23% of the original full-year target of 347 m ton, but well short of demand. The incremental supply of 6 m ton in 1QFY13 by CIL is in contrast to incremental demand of 13 m ton for 12GW of additional capacity commissioned in FY12, resulting in lower utilisations for the power companies. The supply to the power sector last year itself was well short of demand.

What to expect?
At the current price of Rs 317, the stock is trading at a multiple of 3.1 times our estimated FY15 book value. Despite improved performance in production and offtake, we maintain that CIL is likely to face the overhang of the incremental production being channeled to the highly regulated power sector. CIL board has approved graded penalty system for the new FSA with a trigger level of 80% (60% from domestic source and 20% from imports) vs. 0.01% penalty earlier. CIL is unlikely to face any penalty as historically it has always met its FSA commitment and earned bonus. Also, higher cost of imported coal will be borne by power generating companies. The price pooling aspect though remains a concern due to lack of clarity. Hence we believe that at the current valuations the upsides in the stock are limited over the next 2 to 3 years.

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