21 Feb , 2022 By : Kanchan Joshi
Coal India Ltd (CIL) witnessed a remarkable 22% sequential growth in consolidated revenues during the December quarter (Q3FY22). One factor that drove this improvement was the strength in price realizations in coal sold through e-auctions. In Q3, e-auction realizations stood at Rs1,947 per tonne, a 42% premium over coal sold through fuel supply agreements (FSAs). It helps that higher global coal prices have further boosted e-auction realizations. The state-run coal producer told analysts that the e-auction premium over FSA coal stood at about 100% in January. That apart, domestic coal demand is robust, which helps volume outlook. These factors should support CIL’s earnings prospects in the near-to-medium term, at least.
In Q3, e-auction realization rose by 22% vis-à-vis Q2, while that of FSA fell about 1%. Note that FSA volumes rose about 23% sequentially, while e-auction volumes fell about 4%. Analysts point out CIL was not able to fully capitalize on higher e-auction realizations due to the diversion of incremental volumes to power linkages. To that extent, e-auction volume growth was impacted. But, CIL’s Ebitda (earnings before interest, taxes, depreciation and amortization) increased by 26% year-on-year to Rs7,385 crore, which is decent. This is Ebitda excluding stripping activity adjustment expenses.
Meanwhile, CIL’s investors await potential price hikes in the FSA segment with the cost outlook posing a headwind. In a call last week, the management acknowledged the urgent need for price hikes. “Cost pressures continue to be severe on many fronts, and are being masked by higher volumes and realizations. Hence, we believe, price hike is the only sustainable means to counter the cost increases," said ICICI Securities Ltd.
Further, every fifth year, CIL raises wages and a revision has been due since July 2021. CIL expects wage negotiations to conclude by FY23-end. It is currently making a provision of about rs100 crore per month for wage hike. “(This) is much smaller than the increases in previous instances. In the last two revisions, staff cost rose 44% over FY11-13 and FY16-18; we factor in 38% increase over FY21-23," said analysts from Jefferies India Pvt. Ltd in a report on 17 February.
One positive is that CIL is viewed as a good dividend play. The company has announced a second interim dividend of Rs5 per share, taking the total dividend so far in FY22 to Rs14 per share. Bloomberg data shows the stock trades at 5.8 times estimated FY23 earnings, which is undemanding. Price hikes are a key trigger ahead
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