The following is Stock Analyst Note on Coal India, published by Morningstar Analyst Manish Vaswani following the company's third-quarter earnings. Registered Morningstar Members gain exclusive access to our full Coal India Stock Analyst Report, including fair value estimates, consider buying/selling prices, bull and bear breakdowns, and risk analyses. Not a Registered member? Get these reports immediately when you sign up with Morningstar for free.
Coal India delivered a mixed third quarter for fiscal 2013. Although the company reported higher revenue and earnings for the quarter, its operating and net margin declined compared with same period last year. However, given the performance so far during the first nine months of fiscal 2013, we think the company will meet our projections for the year and we are maintaining our INR 327 fair value estimate.
The company’s third-quarter revenue grew 13% year over year to INR 173 billion owing to a 9.2% increase in coal offtake (to over 120 million tons) as well as a 3.3% increase in sales realization per ton. This growth in offtake was driven by a 2.4% increase in production coupled with inventory liquidation.
Third-quarter operating margin declined by more than 370 basis points largely on account of a more than 190-basis-point increase in welfare expenses as well as a 75-basis-point increase in power and fuel costs.
However, the company’s net income grew by 9% to INR 43.9 billion, while net margin declined by only 90 basis points to 25.4% owing to 25.7% increase in other income to INR 23.6 billion, and a more than 130-basis-point reduction in tax expenses.
For the first nine months of fiscal 2013, Coal India’s revenues have increased 13% year over year to INR 484 billion due to 8% increase in offtake (to over 335 million) and 4.1% increase in sales realization per ton. Operating margin for this period declined by 200 basis points primarily due to over 150 basis points increase in employee benefits expenses and 70 basis points increase in welfare expenses.
The company’s net income during this period increased by about 11% to INR 119 billion while net margin fell only about 40 basis points due to a combination of an increase in other income and decrease in tax expenses.
The company’s fourth quarter has historically been the strongest quarter in terms of production, offtake and revenue, and we expect the same this year. Given the progress made during the first nine months of fiscal 2013 in terms of increase in production and offtake as well as enhanced sales realization per ton, and our expectations of a robust fourth quarter this year, we believe Coal India is well on course to deliver another solid year with excess returns over its cost of capital.