Coal India set to benefit from new fee and volume uptick

Coal India Ltd (CIL)’s profitability should benefit from a rise in coal earnings. Last week, it introduced evacuation facility charges of Rs50 per tonne on all coal despatches (except despatches through rapid-loading arrangement) with immediate effect. This is expected to generate incremental annual revenue of Rs2,500 crore, adding Rs800 crore to revenue in the current fiscal alone.

The additional charge is a quasi price hike, and will directly add to Ebitda, given no additional costs expected, pointed out analysts from JM Financial Institutional Securities Ltd in a report on 20 December. Hence this partially offsets wage cost provisioning impact (for union labourers) of Rs5,500-5,600 crore, which is already factored into the brokerage’s estimates.

Ebitda is short for earnings before interest, tax, depreciation and amortization, a measure of operating profitability.

Still, investors weren’t impressed and the stock hardly reacted. In fact, CIL shares, though about 12% higher than their closing low in August, have lagged the benchmark Sensex by a wide margin so far this fiscal. Based on Bloomberg data, the stock currently trades at 12.5 times estimated earnings for the next fiscal year.

Analysts believe volume growth outlook will start looking better in the coming days. During April-November 2017, CIL’s production increased 1.8% year-on-year, whereas offtake (despatches/sales volume) improved at a faster pace of 8.1%. However, offtake in November alone was relatively slower at 5.2%. Nonetheless, according to Motilal Oswal Securities Ltd, “Coal inventories at the power plant remain low at just 9 days of consumption or ~12mt. Restocking to normative 20-25 days of consumption will aid dispatch growth, even if power generation were to remain weak due to seasonal weather conditions.”

Despite a steep increase in cost on account of the wage hike, Motilal Oswal expects adjusted Ebitda to rise at a compound annual growth rate of 15% over fiscal 2017-19 to Rs19,700 crore. “Growth in Ebitda is driven by annual volume growth of ~7%, operating leverage and other operating income,” said Motilal Oswal in a 20 December report.

So far, CIL has achieved 95% of its production target and 97% of its offtake target. Analysts expect the company to miss its full-year targets this year. Still, investors would do well to watch the extent of volume improvement hereon. CIL’s FSA (fuel supply agreement volumes) realizations had improved quarter-on-quarter in the September quarter and it will be worth watching whether the trend continues. That apart, price hikes, if they happen, augur well for the stock.