Coal India Ltd. shares lost 4.3 percent on the National Stock Exchange on November 15 after the company’s results for the three months ended September were not exciting enough, particularly on the realisations front.
Q2 sales increased 9 percent year-on-year to Rs 21,292 crore, the state-owned company said on November 12 after trading hours. Average realisations stood at Rs 1,448 per tonne, short of expectations.
Price realisations of coal sold through e-auctions increased by only 1.6 percent quarter-on-quarter to Rs 1,593 per tonne. In general, analysts had expected relatively stronger e-auction realisations as international coal prices had increased at a faster pace in Q2.
E-auction realisations can be expected to improve in the current December quarter.
“Company indicates a 2-3 months lag between e-auction bids and actual delivery of coal,” analysts from JM Financial Institutional Securities said in a report on November 12. “As per the Ministry of Coal monthly reports, e-auction realisations for August-September 2021 were at a 42 percent/59 percent premium to FSA prices, in-line with a surge in international coal prices. Hence it implies that once these contracts are delivered in Q3, the e-auction realisations are expected to be higher (about 44 percent premium to FSA versus 14 percent premium in 2QFY22).”
FSA refers to coal sold through the fuel supply agreements.
JM Financial added that with the easing of international coal prices in November, e-auction premiums may come off by Q4 of FY22 or Q1 of FY23.
Coal India’s volume performance was decent in Q2, with offtake increasing by about 10 percent year-on-year. But then, higher costs weighed on profitability with other income also declining. The upshot: Coal India’s net profit was marginally lower by 0.65 percent to Rs 2,933 crore.
Going ahead, a wage revision is due and that could potentially weigh on earnings. To offset its impact, commensurate price increases would be needed.
To be sure, while Coal India has been a strong dividend play over many years, there are risks ahead.
“Constantly rising wage bills (partially offset by employee attrition) have weighed on the earnings growth of the company,” analysts from Kotak Institutional Equities said in a report on November 15. “Single-digit revenue growth only helps offset the cost increase, while the increased capex intensity—the company targeting capex of Rs 45,000 crore (KIE estimates: Rs 36,700 crore) over the next three years will likely impair cash generation.”
The brokerage has a ‘reduce’ rating on the Coal India stock with a fair value of Rs 160 for the stock. Coal India shares closed at Rs 159.70 on the NSE.
“Longer-term concerns around capability to deliver sustainable volume growth, weakening cash flow profile and ESG (environmental, social and governance) remain,” said Jefferies India’s analysts. The brokerage retained its ‘hold’ rating on the stock with a price target of Rs 170.
These concerns may well keep investor sentiment low for Coal India’s shares.
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