Coal India’s FSA realizations are a sore spot

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Coal India Ltd’s (CIL’s) December quarter consolidated net profit rose 4% to Rs3,005 crore and is better than expectations. In fact, last quarter’s earnings looks encouraging when compared to the decline in profit seen in the June and September quarters.

However, the pain lies elsewhere. Average price realizations of coal sold through the fuel-supply agreement (FSA) route fell 3.4% quarter-on-quarter to Rs1,182 a tonne. The measure was below estimates and comes at a time when the marginal sequential improvement in the September quarter FSA realizations had hinted that the worst was over. Motilal Oswal Securities Ltd believes December quarter FSA decline in price realizations was owing to lower dispatches to non-power customers (these fetch a premium) and that preference was given to the power sector due to a spike in demand.

Realizations for e-auction coal were commendable, increasing 24% over the September quarter and compensating for the underperformance from FSA coal realizations to that extent.

CIL’s costs behaved well in the quarter with power expenses and contractual expenses declining. Overall costs rose 2.8% over last year but net revenue increased at a faster pace of 5.7%. The upshot: Ebitda rose 18% to Rs4,618 crore. Ebitda is short for earnings before interest, tax, depreciation and amortization.

What of the stock? CIL shares didn’t budge on Monday in response to the December quarter results announced on Saturday. They have also lagged the benchmark Sensex so far this fiscal year. Concerns on grade slippages and increase in wages are some factors that have kept sentiments low for the stock. The price hikes the firm took at the beginning of 2018 have brought some solace on that front. That should help FSA realizations this quarter onwards. Still, after the December quarter performance, confidence is not too high. The notable dip in FSA realization is a dampener and poses a question mark on the quantum of incremental earnings increase from the recent revision in non-coking coal prices, said analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd in their December quarter results report.

The CIL stock trades at about 13 times estimated earnings for the next fiscal year, according to data from Bloomberg. Valuations are not expensive. “Volume growth, operating leverage, closure of unviable underground mines and high natural attrition are key drivers of earnings,” pointed out Motilal Oswal in a report. The brokerage firm expects 30% earnings compound annual growth rate over two years (FY18-20).

Source: LIVEMINT