Coal India May Cut Dividends, Warns CLSA
Higher wage expenses and lower sales volume dents Coal India’s performance in Q2.
Coal India Ltd. (CIL) reported its worst quarter since listing with a 77 percent fall in net profit and 8 percent drop in revenue. This was the biggest ever percentage fall in net profit as the company posted its lowest ever quarterly profit since listing.
Higher employee costs and lower realisation hurt the world’s largest coal miner.
Revenue missed estimates for the sixth straight quarter to come in at Rs 16,957.6 crore, 5.6 percent lower than the Bloomberg consensus estimate.
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Employee benefit expense increased by Rs 1,072 crore in the second quarter, owing to a wage revision done every five years. This figure includes an ad hoc provisioning of Rs 710.64 crore towards higher salaries and wages of employees. The total employee benefit expense of Rs 8,047 crore, ate up 52 percent of the total income from operations, and is expected to remain high in coming quarters.
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The Rs 3,650 crore share buy back in October, coupled with a falling bottomline and higher capital expenses, could lead to a fall in dividend payout in this financial year. Brokerage firm, CLSA has pegged the figure at around 60 percent for this financial year.
Given the sharp profit fall in FY17 and rising capital commitments (mining capex + investment in loss-making state-owned fertiliser companies), we see a high risk of Coal India cutting dividend payout in FY17.CLSA’s Note To Clients
Volume off-take is expected to increase though, with brokerage houses citing a rise in the price of imported coal and lower inventory at power plants, which accounts for three-fourth of Coal India’s demand. The off-take has already risen by 6 percent on a year-on-year basis in November this year, showing signs of a revival in the market.
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The company might miss its annual coal production target of 598 million tonnes, having fallen short of the monthly target over the first eight months of the financial year, according to Bloomberg Intelligence. The government owned miner will have to maintain monthly production at an average of 67 million tonnes per month as against a 42 million tonne production average.
Post the second quarter results, six out of the 16 updated brokerage calls maintained their rating, but have reduced their target price.
The consensus ‘buy’ rating on Coal India has reduced to 63 percent from earlier 68 percent.