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Coal India: High cost sink profits
Nov 14, 2013

Coal India has announced the consolidated results for the quarter ended September 2013. The company has posted a growth of 5.8% YoY in net sales and 0.8% YoY decline in net profits for the quarter ended September 2013. Here is our analysis of the results.

Performance summary
  • Net sales increased by 5.8% YoY during 2QFY14. This was on the back of lower e –auction realisations.
  • Operating profits declined by 2.4% YoY. Operating margins decreased by 2% YoY and stood at 18% in 2QFY14 as compared to 20% in 2QFY13.
  • Other income increased by 4.3% YoY.
  • Net profit for the quarter ended September 2013, decreased by 0.8% YoY. This was due to lower realisations and fall in operating profits. Net profit margins declined by 1% YoY.
  • For the half year ended September 2013, net sales increased by 2.6% YoY and net profits declined by 10.1% YoY.


Consolidated operating and financial performance
(Million tons) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Coal production 89.1 97.6 9.6% 191.5 200.5 4.7%
Offtake 101.7 109.1 7.3% 214.8 224.5 4.5%
(Rs m)
Net sales 145,725 154,115 5.8% 310,731 318,839 2.6%
Expenditure 117,109 126,175 7.7% 233,969 251,320 7.4%
Operating profit (EBDITA) 28,617 27,940 -2.4% 76,763 67,519 -12.0%
EBDITA margin (%) 19.6% 18.1%   24.7% 21.2%  
Other income 20,929 21,828 4.3% 41,642 44,024 5.7%
Depreciation 3,872 4,949 27.8% 9,228 9,706 5.2%
Interest 102 80 -22.2% 229 154 -32.6%
Profit before tax 45,571 44,739 -1.8% 108,949 101,683 -6.7%
Exceptional items 88 91 4.1% 191 142 -25.8%
Tax 14,703 14,124 -3.9% 33,285 33,709 1.3%
Effective tax rate 37.0% 31.0%   37.0% 31.0%  
Profit after tax/(loss) 30,781 30,524 -0.8% 75,473 67,833 -10.1%
Net profit margin (%) 21.1% 19.8%   24.3% 21.3%  
No. of shares (m)         6,316  
Diluted earnings per share (Rs)*          26.2  
Price to earnings ratio (x)          10.5  
(*On a trailing 12-month basis)

What has driven performance in 2QFY14?
  • Coal India (CIL) reported a 5.8% YoY increase in net sales. The underperformance in topline was due to lower FSA (Fuel supply agreement) realisations. Average realizations for the company declined by 1.4% YoY to Rs 1,413/ton due to a 9.7% YoY decline in eauction sales prices. Eauction prices improved on a QoQ basis by 3.8%. Washed coal prices were strong at Rs 2,327, up by 11.6% YoY and 9.9% QoQ.

  • Coal offtake increased 7.2% YoY to 109 m tons on account of increased availability of rakes. The increase in dispatches was largely due to power producers. Production too remained strong during the quarter at 10% YoY to 98 m tons. In 2QFY14 though the production growth was quite strong, it was 2.2% lower than the management's target. Offtake was 2.5% higher than the company's target in 2QFY14.

  • At the operating level, operating profits of the company declined by 2.4% YoY. Operating margins of the company declined by 2% YoY. This was largely on account of lower realizations and an increase in diesel prices. Operating costs per ton of coal increased 0.5% YoY and 6.6% QoQ to Rs 1,156/ton on account of high diesel prices and power & fuel costs. Stores and spares costs jumped 33.4% YoY due to an increase in diesel prices. The management said that stores & spares costs would remain around current levels. Contractual expenses too increased by 27.6% YoY due to higher diesel costs and an increase in contract prices. EBIDTA/ton for the quarter was Rs 256/ton, lower by 8.9% YoY and 25.4% QoQ.

  • Net profit edged lower at Rs 30.5 bn down 0.8% YoY and 18% QoQ on account of muted revenue followed by higher operating expenses.
What to expect?

FOR CIL, the September quarter of FY14 witnessed significant weak operational results due to the change in the mix of coal grade as well change in proportion of sale of coal under FSA which remains tilted towards Power segment. The FSA realisation edged lower despite accounting for full gain for price hike which the company took on May 28th 2013. However it is important to be seen that this mix gets normalised in the second half of FY14 which can improve the FSA realisations and stabilize the operational performance.

The stock price of CIL has been range bound due to a) overhang of price correction during OFS (offer for sale) b) risk to dispatch growth, need 7% plus growth in dispatches to meet the target of 492 MT c) weak market linked realisations.

At the current price of Rs 276, the stock is trading at a multiple of 2.5 times our estimated FY16 book value. Though we do not expect 2QFY14 performance to be repeated, margins are expected to remain subdued due to continued pressure on e-auction coal prices and inflated cost structure. We reiterate our Buy rating on the stock due to a high dividend yield of 5.8% and cheap valuations.

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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