Improving prospects indicate Coal India stock may have bottomed out

Topics Coal India | Q2 results

Overall, analysts are positive on the stock considering cheap valuations
Coal India’s (CIL’s) September quarter (Q2) performance was weak, but in line with expectations. While the demand environment remained weak during Q2, soft realisations and e-auction premiums were expected to dampen operating performance. 

Rising volumes on a low base, however, helped revenues and is now improving prospects for the coal miner.

Sales volumes at 134 million tonnes (mt) were up 10 per cent year-on-year (YoY). The 11 per cent rebound vis-à-vis the lockdown-hit June quarter is being attributed to better off-take by power plants, with other user industries, too, seeing production normalising (thus the requirement for coal). 

While Motilal Oswal Securities had estimated FSA volumes (coal supplied under the fuel supply agreement predominantly to the power sector) at 104.9 mt, they say the 4 per cent YoY rise to 108.2 mt (102.2 mt in Q1) is a positive. E-auction volumes, too, improved 44 per cent YoY to 22.4 mt, higher than Q1’s 15.9 mt.

Soft realisations on a YoY basis, though, somewhat played spoilsport. FSA realisation declined 2 per cent YoY, but at Rs 1,412 per tonne was higher than estimates of Rs 1,380. The market-determined e-auction realisations, however, fell sharply by 29 per cent YoY to Rs 1,437.

E-auction premiums (value above notified prices) have been on a decline thanks to weak global coal prices and lower demand. Analysts, however, expect prices to improve.

Supported by volumes, revenues at Rs 21,153 crore improved 3.7 per cent YoY, and beat Bloomberg consensus estimates of Rs 20,618.5 crore. Soft realisations, along with higher contractual expenses (with the firm ramping up production), resulted in Ebitda of around Rs 3,400 crore — falling short of estimates of Rs 3,658 crore. 

Higher other income and lower interest expenses, though, supported net profit, which at Rs 2,958 crore (down 16.3 per cent YoY) beat estimates of Rs 2,817 crore.

Rising sales volumes and expected uptick in realisations is expected to help CIL put up a better showing in the coming quarters. 

Rupesh Sankhe of Elara Capital expects e-auction premiums to improve 10-15 per cent in the ongoing quarter. The company is also planning a significant ramp-up in production and sales. It plans reaching 1 billion tonnes of production by FY24, from 602 mt in FY20. Analysts say the company’s efforts on import substitution are key for achieving sales growth objectives.

CIL has a history of good dividend payouts, but net profit needs to improve to maintain the trend, considering that it is also committed to significant capex, say analysts.


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