Monday, 9 January 2017

Coal India: Stoking the embers

In Commodity News 09/01/2017

Yet another year went by with zero gains for investors in the shares of State-run behemoth Coal India (CIL). The stock price dipped from ₹334 on the first trading day to ₹300 on the last day of 2016, but investors received a dividend of about ₹27 in March 2016 (yield of about 9 per cent at current price). There was a share buy back in October 2016 when 10.89 crore shares (about 1.7 per cent of total outstanding) were bought at ₹335 per share.
Investors can take comfort in the fact that many of the long-drawn issues such as low output ramp up, grade quality slippage, rail rake availability, falling global prices seem to be getting resolved. Dampeners, including fall in coal demand from power plants and dip in realisations, are also likely to ease in the next few quarters.
CIL’s stock price took a hit after a poor September quarter performance — revenue declined 8 per cent Y-o-Y to ₹15,645 crore and profit collapsed 76 per cent to ₹600 crore, with higher expenses and one-time provision of ₹710 crore towards wage expenses (revisions, increase in DA and other benefits). While the price recovered somewhat, the stock trades at 16 times the trailing 12-months earnings. This is within the valuation range of 12 to 17 times it traded in the last three years.
Investors can buy the share at current levels, given CIL’s leadership position (accounting for over 80 per cent of the country’s production), ample coal reserves (about 37 years worth, at current output levels), improving global coal prices and expected pick up in demand.
Revenue to ramp up
CIL’s revenue prospects — impacted by fall in sale volume and realisation — should pick up as there will be likely improvements on both these fronts. CIL’s production has picked up pace, thanks to its expansions and operational improvements such as adding modern equipment and coal washeries. Also, the bottleneck of rail rake availability to transport coal has been easing with new lines and additional rakes provided by the Railways.

The only fly in the ointment is tepid demand. Coal consumption was in a downtrend since August as there was coal stockpile and power generation growth was slow. Data from the Central Electricity Authority shows that after a dip between August and October, power generation improved in November, aiding CIL’s monthly offtake. Demand would be further boosted by the Government’s ongoing push to lower coal imports, coupled with higher global prices that make local coal an attractive option. Also, as the State electricity distribution companies become healthier with the effects of UDAY scheme starting to kick in.
In the long term, 63GW of thermal capacity additions, already in the works, are expected to be operational by 2022 (about 34 per cent increase from current levels). This will drive coal demand.
Margins to inch up
CIL’s profitability has been impacted by lower realisation as well as higher expenses. Prices of higher grade of coal were cut by 14-29 per cent in April 2016.

Realisation slipped to an average of ₹1,345 per tonne in the first half of 2016-17, down from ₹1,440 in the same period last year. Globally, however, thermal coal prices are up over 90 per cent this year. It is likely that CIL will be able to raise prices, especially in the light of its wage increase; this should aid revenue and margins.
Also, higher priced e-auction sales volumes and prices were tepid as demand from non-power users was weak. As industrial activity picks up, demand from those without a contract will increase, aiding higher e-auction prices and hence profit.
Due to lower realisation and higher employee expenses (up 15 per cent Y-o-Y), operating margin in the September quarter fell to 6.5 per cent, down from 23 per cent in 2015-16. We expect margin to recover to over 20 per cent levels in 2017-18.
In 2015-16, revenue increased 5 per cent Y-o-Y to ₹75,644 crore; net profit increased 2.8 per cent to ₹14,107 crore.

Source: The Hindu Business Line