Coal India: waiting for volume growth


This week, the Coal India Ltd (CIL) stock touched a new low for this year. On Monday, the stock dropped to Rs242.60 during trading hours.

The coal producer announced provisional production and offtake numbers for June on Sunday, which were far from impressive. It achieved 92% and 94%, respectively, of its production and offtake (or sales volume) target for last month. As the chart alongside shows, production and offtake growth has been the slowest in June so far this fiscal year. Analysts say demand from power plants has been well below expectations.

For the June quarter, offtake growth stands at 3.1% on a year-on-year basis and there are risks to CIL’s full-year targets. Analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd point out that if the company has to meet its fiscal year 2018 (FY18) targets of 600 million tonnes (mt), the implied daily production and offtake run rate is 1.76mt and 1.69mt, respectively, over the next nine months. This implies 12.3% and 12.8% year-on-year growth in production and offtake, respectively, over the next nine months, says Nomura. Needless to say, meeting its targets will be a tall order for the company.

Nevertheless, volume growth can be expected to improve from now on. According to Kotak Institutional Equities, coal dispatches should improve given the improving profile of generation and record low levels of inventory at power plants (11 days as of end-June 2017). The favourable base of the September 2016 quarter should offer some support this year. Price hikes, if they happen, will be positive.

CIL’s shares have recovered a bit from Monday’s lows. After adding back the dividend of Rs19.90 per share it gave in March, the stock price is still about 10% lower so far in 2017. In comparison, the Nifty 50 index has gone up as much as 18% during the same time frame.

Currently, one CIL share trades at 13 times estimated earnings for FY18. But the outlook isn’t bright unless volume growth improves. Expectations from the June quarter financial results aren’t rosy. Kotak expects a steep decline in net profit on account of wage provisions in the June quarter.


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