Coal news and updates

Higher costs, weak e-auction realizations weigh on Coal India

Coal India Ltd’s (CIL) shares are down by about one-fourth since its one-year high on 4 August to Rs.338. During this time, it missed profit expectations for the three months ended June and the government announced its intention to sell 10% equity via an offer for sale. Weaker e-auction prices have been a worry, too.

Unfortunately, the September quarter earnings declared on Friday after market hours offer little cheer. CIL missed analysts’ estimates again. Consolidated net profit increased 16% from a year ago to Rs.2,544 crore. That compares with the Rs.2,741 crore estimated by analysts, according to a Bloomberg survey.

The coal producer missed earnings before interest, taxes, depreciation and amortization (Ebitda) forecast, too.

Ankur Kulshrestha, an analyst at HDFC Securities Institutional Research, says higher employee costs were the main culprit for the lower-than-expected performance, with the company’s reported Ebitda of Rs.2,520 crore a good 21% below estimates.

Employee cost as a percentage of total operating revenue was 43% during the quarter. Higher contractual expenses and other expenses, too, weighed on profits.

However, the revenue growth at 8% beat expectations, supported by 10% volume growth. Average blended realization fell 2% to Rs.1,390 per tonne. That parameter was lower sequentially as well. While realizations of volume sold through fuel-supply agreements (FSA) increased, e-auction realizations declined. E-auction realizations have been suppressed for some time now, thanks to lower international coal prices and weak demand from user industries.

Having said that, it is heartening that e-auction premiums (over FSA realizations) are in line with expectations, says Kulshrestha. “Our checks indicate that the prices have recovered from their August lows and the premiums should revert to historical levels (typically at import parity).”

Analysts expect e-auction prices to improve in the second half of this year. But that depends to a great extent on the improvements in demand from the power sector, cement and other end users. On the production and offtake (sales volumes) front, CIL’s numbers so far this year, though below target, are encouraging. From April-October, production and offtake increased 9% and 10%, respectively.

Nomura Research points out the implied run-rates for CIL to achieve its memorandum of understanding-based FY16F production/offtake targets (550 million tonnes each) from hereon are 1.83 mt/day and 1.68 mt/day, respectively (i.e., production/offtake growth rates over the next five months at 13.5%/15.4%). That is a tall order.

Investors would do well to follow developments on the e-auction prices and volume fronts. From a near-term perspective, the government stake sale could well act as an overhang. Currently, the CIL stock trades at about 12 times estimated earnings for the next fiscal.

source: http://www.livemint.com