Share Coal India mining minerals industries

For the past few quarters, Coal India has been struggling operationally, owing to unavailability of logistical support, an extended monsoon, a slow decision making at the Centre and land & environment clearance issues.

The company’s production growth has remained almost flat for the last few quarters. Also, its sales volume growth has remained muted too.

Because of all these reasons, the company’s stock has been beaten down 25% in the past six months, despite high demand for coal. Coal India is now trading at a price of Rs 311 per share. This is at a price to earnings multiple of 15 and EV/EBIDTA of 8 - a valuation which is at a small premium to other foreign mining companies. But this looks reasonable, considering the strong balance sheet, the high level of coal reserves owned by the company, highest return ratios among the mining companies and the huge demand for its coal. But it remains to be seen how the change in pricing will play out and impact the company.
Source - Economic Times

Coal India Ltd (CIL) (updated - 03 Jan 2012)
State-run Coal India has announced a change in the pricing method for its non-coking coal, which should help the company improve price realisation per unit and maintain its profitability. The changes come at a time when the company is under pressure to raise the wages of employees.

Employee costs constitute close to 57% of the company’s total expenditure. A 10% rise can reduce the earnings before interest, depreciation and tax by nearly 500 basis points to close to 27%.

Coal India is in talks with employees and is likely to announce a wage hike soon.

A change in the pricing method for non-coking coal can partially offset the impact of this. Non-coking coal is mainly sold to power-generating companies and contributes nearly three-fourth of the company’s total sales. The company sells this category of coal at a major discount to the spot coal prices and a price increase will not result in a slowdown in demand. It now appears that a higher price realisation is the only way out for the company to achieve a growth in its earnings, especially when it is not able to improve its operational performance.

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Coal India has not signed any fuel supply agreement since March 2009 and its offer of 50% supply guarantee has not been acceptable to power producers. Since the beginning of the impasse, about 28,300 MW of capacity has been added, requiring close to 119 MT of coal. From April 2009, the company has already supplied 82 MT, which means it will fall short by 15 MT in attaining the 80% mark. The shortfall is expected to rise to around 50 MT by next fiscal end.

Either the company will have to arrange this coal from outside or pay a penalty. Arranging coal from outside is not a lucrative option, as the price of international coal is around Rs 4,500 per tonne depending on the grade of coal versus Rs 1,163 per tonne at which Coal India sells under the fuel-supply agreement. This would mean that the company will be buying at a higher price and selling at a lower price, taking a hit on its earnings. The other option is to divert some coal from its e-auction segment. But this will also impact future earnings. Despite lower sales volume growth in the past one year, its earnings have strongly grown due to higher realisation, mainly from e-auction sales, which have resulted in higher realisation.

Realisation through e-auction is Rs 2,852 per tonne, or 145% higher than coal sold through fuel supply agreement at Rs 1,163 per tonne. Thanks to higher contribution from e-auction (11%against less than 10% a year ago), the company’s realisation rose 21% y-o-y, while operating profit grew 35% and sales 21%. Coal India will also see some pressure on the cost side from its revised wages. This will increase employee expenses by around 25% to 30%. Total employee expense is 40% of total sales.

In the long term, too, meeting the 80% guarantee level does not appear feasible, given the slow procedures for environmental clearance and land acquisition. To maintain its profitability, the company will have to start looking aggressively for acquiring mines abroad. Its strong balance sheet with a cash of Rs 55,000 crore can support this. Coal India will be shifting to a new pricing mechanism based on the gross calorific value of coal, which will further improve the company’s average realisation. According to industry experts, this will further improve the average realisation by 4-5%, which will also increase sales by 4-5%.

The impact of all this will start getting reflected in the company’s numbers from the fourth quarter. Besides this, the company will also be receiving bonuses from power utlities for timely supply of coal in the fourth quarter. On the operational front, the company will have to increase its production and coal offtake in Q4 of FY12 at 12% to 14% y-o-y to meet its given targets. It has remained stagnant in the first nine months of the fiscal.

Considering all this, the fourth quarter will be critical. Till then the stock’s price will be range-bound.
Source - Economic Times

Coal India Ltd (CIL) (updated - 05 April 2012)
The Presidential directive to Coal India to ensure long-term fuel supply to power companies may in fact work in favour of the company. That is because according to the earlier clause, the company was supposed to pay a higher penalty - 10-40% of the shortfall with the trigger limit set at 80%. But the state-run firm now has more leeway on this front with the government leaving it to the board of directors to decide on the penalty which is expected to be much lower.

For investors, Coal India’s ability to guarantee fuel supply may be a concern, considering the company’s dismal performance in the last one year, but one needs to keep in mind the fact that the Presidential directive could well boost its performance in coming years, given the greater sense of urgency shown by the government to sort out the mess in the power sector. After a decline of 1.6% in the first ten months of FY12, production rose by 17% and 7% in the last two months of the previous fiscal.

The average rake availability now is at an all-time high. In March 2012, average rake availability was 199 rakes per day compared to 160-170 rakes daily in FY11 and FY12, signaling accelerating coal dispatch. The company has also been in talks with the environment ministry to ensure speedy approvals for its projects. It has already secured environment clearance for ten projects in the past two months.

Besides this, the company will also be eligible for incentives if it is able to meet 90% of the assured fuel supply. Its subsidiaries - South Eastern Coalfields and Bharat Coking Coal - have met their production and offtake targets. There may also be marginal price increases in FY13, considering the pressure from Coal India’s single-largest minority shareholder, the UK’s The Children’s Investment fund, an activist hedge fund, which holds close to 1% in the company and has threatened legal action against the company and its board of directors for giving in to the government on pricing of coal. All these measures will help the company boost its sales volume over the next few years. The only segment where the company will be impacted is earnings from e-auctioning of coal. E-auction sales accounted for only 11% of total sales, but contributed close to 21% of operating profit. The company might have to divert some coal from this segment to meet its commitments, according to the fuel supply agreements. However, this will be more than offset by the increase in sales volume.
Source - Economic Times