Divestment plans loom over CIL's prospects

Coal India Ltd’s performance during the quarter ended September bore the brunt of lower realisations, which surprised the Street.

This, along with higher expenses led to profits being lower than expectations.

Disappointed with the performance and news the government would start road shows in three nations next week to divest its five per cent stake in the company, the stock slumped to an intra-day low of Rs 271.5 before closing about four per cent down at Rs 274.1 on the BSE on a day when the Sensex gained a per cent.

However, analysts expect realisations and output to improve in the second half and given the reasonable valuations, they are positive on the stock.

Lower realisations disappoint

The company had raised prices five-six per cent in May for coal supplied under fuel supply agreements.

Further, its coal dispatches of 109 million tonnes (mt) during the quarter were 7.3 per cent higher annually.

Amid this, the Street expected better revenue and profit growth.

However, due to lower realisation, sales at Rs 15,412 crore or Rs 154.12 billion (up 5.8 per cent year-on-year) were 3.1 per cent lower than consensus estimate of Rs 15,897 crore (Rs 158.97 billion).

Lower realisations and higher expenses (employee costs increased 6.7 per cent to Rs 6,974 crore (Rs 69.74 billion), while costs of material consumed jumped 33.4 per cent to Rs 1,676 crore (Rs 16.76 billion) resulted in the earnings before interest, tax, deprecation and amortisation falling 2.4 per cent annually and 21.5 per cent sequentially to Rs 2,794 crore (Rs 27.94 billion).

This, too, was much lower than the consensus estimate of Rs 3,269 crore (Rs 32.69 billion).

Consequently, net profit, at Rs 3,052.4 crore (Rs 30.52 billion), though flat against last year, was 10.7 per cent lower than the estimate of Rs 3,418 crore (Rs 34.18 billion).

The reasons for lower realisations include FSA realisations falling 2.6 per cent sequentially and 1.4 per cent annually to Rs 1,262 a tonne.

Analysts at Nomura indicate the bulk of the 11.5-mt coal inventory liquidated in the September quarter was about a year old, leading to lower

grade coal realisation.

Further, within FSA commitments, coal supply to power projects was sharply higher, while the off-take to non-power customers (particularly cement and sponge iron projects) was lower.

Since non-power rates are 35 per cent higher than those to power customers, the impact was visible.

A Religare analyst said average realisations fell 1.3 per cent year-on-year to Rs 1,418 per tonne due to lower e-auction prices (down 10 per cent year-on-year to Rs 2,220 a tonne).

This can be attributed to a decline in international coal prices and lower industrial activity in India.

Analysts said the off-take mix was also skewed towards lower grade coal, impacting realisations.

Outlook

Analysts, however, say they expect an uptick in FSA realisations in the second half of FY14, as coal supplies under FSAs to non-power consumers normalise, approaching the minimum contracted quantity level.

Further, the coal inventory is built during the October-March period and, therefore, supplies will be met through the coal produced during the second half, which will lead to normalisation of the grade mix.

Religare analysts say, “Our channel checks suggest e-auction prices have been firming up in September/October, leading us to believe e-auction prices would have likely bottomed.”

Meanwhile, Coal India saw a 4.7 per cent annual rise in production in the first six months of FY14, while off-take stood at 224.36 mt. Analysts at Motilal Oswal Securities expect the production and dispatches to touch 481.7 mt and 491.7 mt, respectively.

Analysts at Religare say while rake availability was 182.3 in the September quarter compared with 190 in the June quarter, channel checks suggest rake availability is likely to improve in the second half of FY14, aiding dispatches.

Though the outlook appears to be improving, the overhang due to the government’s stake sale in the company will keep the stock under pressure in the near term.

Due to the latest results and the disinvestment overhang, Nomura analysts expect the stock’s near-term performance to remain weak.

However, they are positive from a medium-term perspective and have a one-year target price of Rs 398, owing to reasonable valuations.