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Coal India: Fall in e-auction hurts bottomline - Views on News from Equitymaster
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Coal India: Fall in e-auction hurts bottomline
Nov 17, 2014

Coal India has announced the results for the second quarter of financial year ended March 2015 (2QFY15). The company has posted a growth of 5% YoY in net sales and 8.2% YoY fall in net profits for 1HFY15. Here is our analysis of the results.

Performance summary
  • Net sales grow 5% in 1HFY15. This was on the back of 5.1% YoY growth in production and 2.5% YoY higher volume offtake.
  • Operating profits fell by 5.9% YoY. Operating margins dropped from 21% in 1HFY14 to 19% in 1HFY15, due to lower realisations.
  • Other income fell by 4.5% YoY.
  • Net profit for 1HFY15 dropped by 8.2% YoY, This was despite lower interest cost and lower tax outgo.

Consolidated operating performance
(Million tons) 2QFY14 2QFY15  Change 1HFY14 1HFY15  Change
Coal production 97.6 102.4 4.9% 200.5 210.7 5.1%
Offtake 109.1 110.4 1.2% 224.5 230.1 2.5%
(Rs m)
Net sales 154,114 156,779 1.7% 318,839 334,775 5.0%
Expenditure 126,175 136,084 7.9% 251,320 271,270 7.9%
Operating profit (EBDITA) 27,939 20,695 -25.9% 67,519 63,505 -5.9%
EBDITA margin (%) 18% 13%   21% 19%  
Other income 21,827 20,221 -7.4% 44,024 42,026 -4.5%
Depreciation 4,949 5,363 8.4% 9,705 10,546 8.7%
Interest 79 11 -86.1% 154 22 -85.7%
Profit before tax 44,738 35,542 -20.6% 101,684 94,963 -6.6%
Exceptional items 92 (48)   141 (205)  
Tax 14,123 13,667 -3.2% 33,708 32,913 -2.4%
Effective tax rate 37% 31%   37% 31%  
Profit after tax/(loss) 30,523 21,923 -28.2% 67,835 62,255 -8.2%
Net profit margin (%) 20% 14%   21% 19%  
No. of shares (m)         6,316  
Diluted earnings per share (Rs)*         23.1  
Price to earnings ratio (x)         15.5  
*Based on trailing 12 month earnings

What has driven performance in 2QFY15?
  • Coal India (CIL) saw a sharp correction in operating profits during 1HFY15 due to the pressure on realisations. 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 5% quarter-on-quarter drop in coal realization at Rs1,260 a tonne, due to higher sales of low grade coal and more sales to power utilities than to other sectors. While e-auction quantities declined, realizations were higher but not enough to compensate for the lower proportion. The e-auction proportion was 9.6% versus 14% in 1QFY15 and 11.8% in 2QFY14.

  • CIL's production target for FY15 has been set at 507 MT, while the overall offtake target is 520 MT. Faster environmental clearances and reforms for the power sector are expected to bode well for CIL in FY15. Realisations under e-auction sales and washed coal sales are near their bottom, and any increase in global coal prices would lead to higher realisations for CIL. The recent price hikes indicate the company's ability to pass on the increased costs to maintain profitability.

  • The impact of lower volumes on topline was aggravated by a marginal fall in blended realisations. E-auction volumes continue to remain under pressure as the government has asked CIL to cut down the share the e-auction.

  • CIL has projected requirement of about 221 railway rakes per day on an annual average basis for FY15 as against the average availability of about 184 and 190 rakes/day in FY13 and FY14 respectively. Average growth in rake movement has been around 4.0% during the last four years.
What to expect?
At the current price of Rs 357, the stock is trading at a multiple of 9.0 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 may hurt operating margins for a temporary period, but we believe that higher volumes will compensate for the same over time.

An added comfort is the fact that the stock can offer consistent dividend yield of 3.5 to 5% over the next 3 to 5 years, which itself makes it very attractive.

We recommended investors to buy the stock in June 2014.

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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