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Coal India: Slow but encouraging start - Views on News from Equitymaster
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Coal India: Slow but encouraging start
Sep 5, 2015

Coal India has announced the results for the first quarter of financial year ended March 2016 (1QFY16). The company has posted a growth of 6.5% YoY in net sales and fall of 6.7% YoY in net profits for 1QFY16. Here is our analysis of the results.

Performance summary
  • Net sales grow 6.5% in 1QFY16. This was on the back of 12% YoY growth in production and 8.1% YoY higher volume offtake.
  • Operating profits went up by 2.4% YoY in 1QFY16. Operating margins though dropped from 24% in 1QFY15 to 23% in 1QFY16, due to lower realisations.
  • Other income fell by 7.8% YoY.
  • Net profit for 1QFY16 dropped by 6.7% YoY.

(Million tons) 1QFY15 1QFY16 Change
Coal production 108.3 121.3 12.0%
Offtake 119.6 129.3 8.1%
(Rs m)
Net sales 177,995 189,557 6.5%
Expenditure 135,186 145,738 7.8%
Operating profit (EBDITA) 42,809 43,819 2.4%
EBDITA margin (%) 24% 23%  
Other income 21,804 20,094 -7.8%
Depreciation 5,183 5,575 7.6%
Interest 11 40 0.0%
Profit before tax 59,419 58,298 -1.9%
Exceptional items (157) 225  
Tax 19,245 20,428 6.1%
Effective tax rate 32% 35%  
Profit after tax/(loss) 40,331 37,645 -6.7%
Net profit margin (%) 23% 20%  
No. of shares (m)      
Diluted earnings per share (Rs)*   21.2  
Price to earnings ratio (x)   16.4  
*(Trailing 12 month earnings)

What has driven performance in 1QFY16?
  • Sharp dip in global commodity, particularly coal prices, fall in coal e-auction demand and realizations and slow growth in domestic production, all put together had made FY15 a painful year for Coal India. 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 continued to remain sluggish in the first quarter of FY16 as well, improvement in production volumes in the first quarter of FY16 has been encouraging. The 12% and 8% growth in production and dispatches respectively in 1QFY16 show some signs of revival in coal demand and supply.

  • E-auction sales accounted for 24% of total sales of Coal India in 1QFY16. However the e-auction realizations remained 66% higher than that from fuel supply agreements (FSA).

  • 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.

What to expect?

At the current price of Rs 347, the stock is trading at a multiple of 7.5 times our estimated FY17 earnings per share. Despite the pressure on commodity prices, 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.

Auction of coal blocks is also 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. 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.

Given the upside along with the dividend yield (above 4%), we reiterate our Buy view on the stock.

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