Higher costs dim lights at Coal India in Q4

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The Coal India Ltd (CIL) stock touched a 52-week low of Rs259.50 on Tuesday on the National Stock Exchange. Investors are disappointed with the coal miner’s March quarter results, announced on Monday after market hours.

The company reported a consolidated Ebitda (earnings before interest, tax, depreciation and amortization) of Rs3,387 crore last quarter, which missed Street estimates by a big margin. Edelweiss Securities Ltd says CIL’s March quarter Ebitda came 32% below consensus due to grade slippage provision of about Rs800 crore and higher provisions pending wage negotiations. Ebitda declined 39% during the March quarter compared to a year ago.

What offers some comfort is that revenue growth (excluding excise duty) was healthy at 8% to Rs23,171.6 crore, slightly better than estimates. Sales volumes through e-auctions were strong, while volume sold through the fuel supply agreement (FSA) route fell 3% compared to the year-ago period. However, higher operating costs took a toll on core profit. The upshot: net profit declined 38% to Rs2,718 crore.

CIL’s offtake or sales volume growth in fiscal year 2017 (FY17) was just 1.6% more than the previous year. How volume shapes up in the current fiscal year will be critical for investors. Much depends on how demand from the power sector shapes up.

Currently, one CIL share trades at 12.6 times estimated earnings for FY18. So far in 2017, the CIL stock has fallen about 12.5%. Of course, the company also paid a hefty dividend of Rs19.90 a share this March. Including the dividend, the stock shows about 6% decline till now this calendar year. Analysts say the downside for the stock is limited, while the dividend yield seems attractive enough.

However, earnings growth may not be spectacular this year. Bhaskar Basu of Jefferies India Pvt. Ltd said in a note to clients on 30 May, “While offtake should improve in FY18, we expect earnings outlook to be unexciting as a) full impact of coal grade reset could dent FSA realization in FY18 and b) wage provision may rise further as negotiations progress.” Recently, CIL’s coal grades from its mines were re-evaluated, resulting in a downward revision of some mines based on the quality of coal. Investors would do well to follow its impact on realizations.

In short, there don’t seem to be any triggers for meaningful stock appreciation in the near future. Of course, any price hikes, if at all they happen, will be helpful.

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