Stock Review: COAL INDIA

Higher e-auction sales and other income powered a 64% growth in Coal India's earnings in the first quarter of FY11. Though demand for coal will remain strong across sectors, especially power, India's largest company by market capitalisation will have to manage its operational side to benefit from this.

In the first quarter of FY12, Coal India's net sales rose 27% to . 14,499 crore and its operating margins improved 630 basis points due to higher average realisation per unit of coal sold due to price increases in February and higher sales through e-auction.

Sales through e-auction accounted for 12.7% of total revenues against 11.1%, with average realisation being 2,245 per tonne, almost two times the price notified by the company earlier. Its other income was also up by almost 50% to . 1,572 crore, taking the net profit to . 4,144 crore. For the current fiscal, Coal India has set a coal production target of 452 million tonnes, 4.8% higher than previous year's and to avoid the piling up of the already huge inventory, it has set a year-on-year 7% higher dispatch target of 458 million tonne. Though the yearon-year numbers are good for the first quarter, it needs to be noted that the company missed the production and dispatch target by 16% and 2%,

respectively. The growth has been primarily because of a higher selling price. Coal production in the first quarter was 96.3 million tonne, or 21.3%, of the target set for the year and it dispatched 23.2% of the yearly target in the first quarter. Higher dispatch was possible, primarily because of the higher availability of the rail rakes, 168 per day against 154 per day in the June quarter previous year.

But in the second quarter, the company's production will be impacted due to heavy rainfall, which was not very severe last year. Also, the company's performance is strongly linked to the rakes being available to dispatch coal from the mines. To achieve the remaining target, it will need around 175 rakes per day, which will not be so easy. Rake availability in the first quarter was 168 per day. Given this, the company's future performance will be highly dependent on average coal selling price and other income. Another price increase this year looks less likely because of inflationary pressure. The huge cash pile of close to . 50,000 crore on its books will help the company boost its other income in a high interest rate scenario. At the current market price of . 394, the company is trading at a price-to-book value of 7.5 and any upside looks limited.