In the fourth quarter, Coal India Ltd usually has increased production and has often been able to surprise the Street with production and improved sales volume growth.
This time, the lockdown caused by the Covid-19 pandemic put Coal India ‘s operations on the back burner.
While production volume growth was good, sales volumes rose sharply. Coal demand has been sluggish and is expected to remain soft in FY21. Coal India shares were flat in trade.
Coal India’s 3% year-on-year (y-o-y) revenue growth over the quarter also reflects lower e-auction performance and is a concern. The 8.8% drop in its operating margin is also a reflection of the lower operating leverage. The Ebitda margin in Q4 was 34.5 per cent , compared to 36.5 per cent in the previous quarter.
After lower Q4 figures, the coming quarters seem to pose challenges. The lockdown in April and May brought down the production of Coal India. In addition , power companies with sufficient coal stocks have led to a decrease in demand.
“With power plants currently at peak coal stocks (30-32 days), any recovery in power demand (as the lockdown is relaxed) may not reflect in higher coal demand in 1HFY21. Also, 2Q is seasonally a weak quarter with the monsoons hampering mining and higher hydro-power generation offsetting demand for thermal power,” pointed out analysts at JM Financial Institutional Equities in a note to clients.
Even so, demand pick-up is expected only in the second half of the year, once power companies have lifted clear inventories and lock-down restrictions. That would still drag on the growth of profits in FY21. Indeed, analysts predict that the profitability of FY21 will fall by about 47%, a huge reduction.
The recent auction of coal mines may not have a significant impact on Coal India in the near future. According to analysts, most of these mines will take about 5-7 years to begin commercial production, as land acquisitions and other clearances will be required. As such, competition from the new auctions will not hinder the growth of Coal India.
But the stock may be meandering for some time, as demand for coal remains weak. The stock quotes multiple earnings of 5.2 times its earnings of FY20 at a price. But this is set to expand considerably as earnings slip in the FY21.
