Coal India’s stellar Q1FY23: Largely thanks to coal shortage

Coal India's wage costs have decresed by 3% year on year. (Photo by Dexter Fernandes/Pexels)

Coal India reported a massive year-on-year jump in its operating profit during the quarter ended June 30 despite a 30.7% reduction in e-auction volumes and only 11% growth in overall volumes.

Earnings Before Interest, Tax, Depreciation and Amortisation (Ebitda) rose 152% to Rs 12,250 crore over the same period.

Quarter-on-quarter, e-auction volumes fell by 24.4% and overall volumes fell by 1%, but operating profits rose 35%.

So what is driving these impressive increases in profits?

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It seems to be largely because of coal prices rising globally as also reflected in the escalation of raw material prices by 60% year -on-year.

The significant part of the profits came from the ability to charge higher price in e-auctions–the average selling price (ASP) per tonne through this channel went up by 176.6% yoy and by 78.3% qoq–and a smaller part by improved operational efficiency.

Wage costs falling by 3% yoy also helped the bottom line. Along with employee costs, overburden and social costs have also dropped. Overburden costs are what mining companies have to bear to clear a site.

Overall, the company improved its margins to 30% from 12% a year ago and 21% a quarter ago.

Technological advancement
While its e-auction profits have been stellar, Coal India sells a massive 85% of its total volumes through fuel supply agreements (FSAs).

According to securities firm Prabhudas Lilladher, though there was a delay in increasing FSA prices, the coal producer managed to realise strong revenue from the FSA route by better coal-grade management. The firm has retained its Accumulate rating on the stock and revised the target price upwards to Rs 255 from Rs 220.

Coal India sells nearly 17 different grades of coal, which are graded by its calorific or heat-generation value. For the past few quarters, the producer has been able to achieve higher grades of coal because of improved mining operations. Industry exports say that Coal India used to operate mines using little mechanisation but that has changed in the recent past, with the company deploying newer technologies.

While this seems like a structural change in its operations and looks sustainable, the profits realised from e-auctions may not hold beyond the first half of this fiscal year.

According to Kotak Institutional Equities, the strong auction realisations reflect “the strength in prices of imported coal, a trend less likely to sustain in the medium term”.

“High prices of imported coal will likely continue for 1HFY23 and will support demand as well as auction prices,” added the Kotak analysts.
The advantage from lower wage costs may recede too. “Provision for wage costs (due to revision due from July 2021) and higher capex will contain cash generation,” they added. There is an ongoing tussle between Coal India and its workers, with the former offering a 3% hike and the latter asking for a 47% increase. Once an agreement is reached, the wages will change retrospectively from July 2021.

Kotak has maintained its Reduce call with a revised fair value of Rs 225/share from Rs 185/share. The upside risk to this estimate comes from elevated imported coal prices, which will then sustain the higher e-auction realisations.

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But wage revisions may need to be considered along with FSA price revisions, if we go by Prabhudas Lilladher’s report.

“Investors argue that COAL’s costs are understated as wage revision is pending for non-executive employees (94% of total headcount) since July’21, overlooking the fact that FSA prices are also not increased for the last four-and-a-half years. Usually, upward revision in wages is followed by hike in FSA prices,” its report stated.

The brokerage has increased its EBITDA estimates for FY23 and FY24 by 10-12%, on account of FSA and E-auction realisations.

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