Coal India reported fourth-quarter results that were generally in line with our expectations, and we don’t see need to change our long term estimates and narrow moat rating.
Production volumes and price realization grew by 6% and 3% respectively over a year ago. However, owing to logistical bottlenecks, coal offtake volumes from the mines grew by only 3.7% over a year ago. This implied higher sales volumes through electronic auction where company was able to garner higher prices versus coal sold under contractual commitments.
While sales revenue grew by 7% to Rs 214 billion versus same period last year, it was the operating margins which spurted to 25% in the seasonally strong fourth quarter on the back of higher e-auction volumes. Fourth quarter performance has ensured that company has met our full year net income estimates.
We believe Coal India will face pressure on margins in the first half as international coal prices have been subdued and have become competitive versus higher grade domestic coal. In addition, state levies forming 50-60% of the cost of the coal implies lower flexibility to increase price of the higher grade coal. However, we believe Coal India will be able to reap dual benefits of productivity gains through increasing mechanization and higher production through opening up of new mines. This is the premise of our long term 23% operating margins, similar to last three year average, as we continue to believe there is limited upside to the operating margins in the near term.
We have maintained our fair value at Rs 380 per share. Our fair value estimate implies a dividend yield of 3% and stock is fairly valued at the current share price. We think the company enjoys a narrow moat due to cost advantage afforded by vast and relatively shallow open cut coal mines. This is reflected in our five year estimated average 53% returns on invested capital. High fair value uncertainty reflects dependence of growth assumptions on government policies and ability to carry out reforms to ease logistical bottlenecks.
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