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Coal India: Low e-auction price caps profit
Nov 20, 2012

Coal India has announced the consolidated results for the quarter ended September 2012. The company has posted a growth of 10.8% YoY and 18.7% YoY in net sales and net profits respectively for the quarter ended September 2012. Here is our analysis of the results.

Performance summary
  • Net sales grew by 10.8% YoY during 2QFY13. This was on the back of higher realisations and higher offtake.
  • Operating profits increased by 14.9% YoY. Operating margins improved by 0.7% YoY and stood at 19.6% in 2QFY13 as compared to 18.9% in 2QFY12.
  • Other income increased by 17.2% YoY on account of higher cash balance and increased treasury yield.
  • Net profit for the quarter ended September 2012, increased by 18.7% YoY. Net profit margins increased by 1% YoY.
  • For the half year ended September 2012, net sales and net profits increased by 10.8% YoY and 18.7% YoY respectively.

Consolidated operating and financial performance
(Million tons) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Coal production 80.3 89.1 10.9% 176.6 191.5 8.4%
Offtake 93.7 101.7 8.5% 200.0 214.8 7.4%
(Rs m)
Net sales 131,481 145,725 10.8% 276,472 310,731 12.4%
Expenditure 106,585 117,109 9.9% 203,414 233,969 15.0%
Operating profit (EBDITA) 24,896 28,617 14.9% 73,058 76,763 5.1%
EBDITA margin (%) 19% 20%   26% 25%  
Other income 17865 20929 17.2% 33,531 41,642 24.2%
Depreciation 5734 3872 -32.5% 10,042 9,228 -8.1%
Interest 128 102 -20.3% 226 229 1.3%
Profit before tax 36898 45571 23.5% 96,321 108,949 13.1%
Exceptional items -165 88   -297 191  
Tax 11132 14703   29,248 33,285  
Effective tax rate 37% 31%   37% 31%  
Profit after tax/(loss) 25931 30781 18.7% 67,370 75,473 12.0%
Net profit margin (%) 20% 21%   24% 24%  
No. of shares (m)         6,316  
Diluted earnings per share (Rs)*         24.7  
Price to earnings ratio (x)         14.2  
(*On a trailing 12-month basis)

What has driven performance in 2QFY13?
  • Coal India (CIL) reported a 10.8% YoY increase in net sales. CIL's blended realizations stood at Rs 1432/tonne, up by 2% YoY but lower by 2% QoQ. FSA raw coal realizations remaining firm at Rs 1287/tonne but e-auction coal realizations fell to Rs 2282/tonne (lower by 11% QoQ and down for second successive quarter on account of cheaper import option for buyers).

  • At the operating level, operating profits of the company increased by 14.9% YoY. Operating margins of the company improved by 0.7% YoY. CIL has managed its costs well over the past year when it witnessed inflationary pressures on most cost heads. Despite the tough regulatory environment and other high impact issues such as wage settlement witnessed in the past year, the company could manage to keep its cost per MT at the same level as the past year. Employee costs rose 15% YoY to Rs 65 bn due to wage revision effective July 2011. CIL benefited from lower depreciation and reversal of bad debt provisioning during the quarter.

  • Net profit for the quarter ended September 2012, increased by 18.7% YoY. Net profit margins saw an increase of 1% YoY. Benefits of strong volumes and higher YoY FSA realisations were offset by lower e-auction prices and higher costs (wages). Other income (excluding recovery of transportation costs) rose 22% YoY to Rs 17.7 bn. Cash as of September 30, 2012 was USD $12 bn.

  • During the quarter, CIL's renewed focus on volume has resulted in production and offtake of 89.1 m tonnes (up 10.9% YoY) and 101.7 m tonnes (up 8.5% YoY). CIL liquidated 13 mt of inventory in 1QFY13 (23 mt in 1HFY13 out of 70 mt). Rake availability in 2QFY13 was 162/day (vs 145 last year). Despatches via rail rose 12% YoY and deliveries to the power sector were up 13% YoY. In 1HFY13, the company has already achieved 41% of FY13E production target. Having tracked well in terms of realization and profitability for 1HFY13, the company intends to maintain focus on volume growth, both on production and offtake. CIL's FY13 production target is 464 mt and dispatch target is 470 mt.

What to expect?
At the current price of Rs 350, the stock is trading at a multiple of 2.9 times our estimated FY15 book value. CIL announced changes to the new FSAs (80% qty trigger) with domestic/import supply split of 65%/15% and penalties below 65% domestic supply ranging from 5%-40% and imported coal to be supplied at cost plus basis. We see robust volume growth ahead but revise our realizations and EBITDA assumptions lower to account for lower e-auction prices and higher fuel costs. We maintain our Hold view on the stock

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