Coal India: Volume increase positively surprises

Last Updated: Wed, Nov 14, 2012 05:29 hrs

First, the good news - Coal India Ltd (CIL) is producing a lot more coal than what the market envisaged. The company's volumes in the second quarter (Q2) are up 11 per cent year-on-year (y-o-y) to 89 million tonnes (mt). Though this is lower than the company's own target of 96 mt, analysts say the uptick is a positive sign.

As a result of higher volumes, despatches are up 8.5 per cent y-o-y to 102 mt. A key beneficiary of this is the power sector, as deliveries are up 13 per cent in the quarter compared to the previous year. The company has liquidated 23 mt of inventory in the first half out of 70 mt. The volume growth has helped CIL post better-than-expected numbers.

The uptick in volumes has also contributed to CIL's profitability. Its Q2 net profit has grown 19 per cent to Rs 3,080 crore, on higher volumes and better realisations from the fuel supply agreements. Realisations from FSAs have inched up 1.6 per cent sequentially, but e-auction realisations have come down by 11 per cent or Rs 280 per tonne. While the impact of this sharp drop in e-auction realisations has been contained by one-time write-back of previous year's provisions, analysts say it is a cause of concern. Employee costs, too, have risen by 6.6 per cent sequentially or Rs 406 crore, to Rs 654 crore on increase in ex-gratia bonus by Rs 230 crore. As a result, the growth in earnings before interest, taxes, depreciation and amortisation came in at 15 per cent y-o-y. The 19 per cent increase in net profit has also been driven by a 17 per cent increase in other income and 32 per cent drop in depreciation.

Transportation infrastructure, too, is seen to be improving for CIL, as rake availability was 170 rakes a day, up 10.4 per cent y-o-y. Barclays says the share of railways in the transportation mix has improved to 50 per cent (48 per cent in H1FY12.). The brokerage says: "CIL will spend Rs 7,000 crore on rail projects, provided it meets their internal hurdle rate of a 12 per cent return. CIL has recently signed a tripartite agreement with the Chhattisgarh government and Indian Railways to develop the 300-km Mand-Raigarh line, which would help to evacuate 120 mt of coal at an investment of Rs 2,500 crore." Though there is an uptick in volumes, some analysts are more worried than others on falling realisations from e-auctions. Most analysts have upgraded their estimates for FY13 and FY14, there are concerns on pooling of domestic and imported coal prices.

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