Coal India: higher wage provision, lower other income make for a dull Q2

After a disappointing June quarter, Coal India Ltd (CIL) reported a consolidated net profit of Rs369 crore for the quarter to September, a 40% decline from the year earlier. That’s way below what analysts were pencilling in. For instance, Kotak Institutional Equities and Prabhudas Lilladher Pvt. Ltd were expecting the coal miner to report a net profit of Rs1,483 crore and Rs1,844 crore, respectively.

A key factor that drove the miss was that CIL made a provision of Rs2,300 crore towards wage settlement in its employee costs, while analysts were considering a lower number. What also adversely affected profitability was that other income dropped sharply by 56% year-on-year (y-o-y).

Total operating revenue increased 4% to Rs18,148 crore. What augurs well is that CIL’s realization for coal sold through the FSA (fuel-supply agreement) route improved from the June quarter when analysts were expecting some recovery in the measure. That recovery finally seems to be taking place. In the September quarter, average FSA realizations stood at Rs1,224 per tonne, an increase from Rs1,201 per tonne in the June quarter. E-auction coal price realization, too, improved quarter-on-quarter.

Meanwhile, at a time when the benchmark Sensex has risen 12.5% so far this fiscal, CIL shares have dropped about 3%. Concerns on volume growth and uncertainties surrounding wage negotiations are some factors that clouded sentiments.

Despite the underperformance, it’s not as if CIL is available cheap. The CIL stock trades at 16 times estimated earnings for this fiscal. Moreover, there doesn’t seem to be meaningful triggers in the near future. The wage hike is behind it.

Analysts expect volume to be relatively healthy here on and that’s encouraging.

Note that monthly volume or offtake growth has been promising in each of the past three months. “As coal inventory at power plants remains at sub-par levels, CIL’s offtake growth outlook remains healthy for the rest of FY18,” wrote analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd in a report on 3 November.

For FY18, Nomura forecasts CIL’s production/offtake at 572/580 million tonnes (mt), implying a 3.2%/6.8% y-o-y growth, respectively. “In this context, CIL’s production growth in 7MFY18 (+1.6% y-o-y) is sub-par but improving, whereas offtake (+8.6% y-o-y) is robust,” added the brokerage.

While the stock will find support from volume outlook, the markets are likely to take a price hike, if it happens, more positively.