Coal India: Higher volume offtake may offset lower e-auction realisations

Rise in output key for re-rating of Coal India stock

Coal India’s (CIL’s) modest 2.6 per cent year-on-year (YoY) growth in dispatches in April was a rather sedate start to FY20. 

While April’s performance comes on a relatively high base, on which volumes rose 12.6 per cent a year ago, the Street will closely watch the increase in output over the coming months. 

Better volumes will not only help meet commitment under the fuel supply agreement, but also drive up revenues of the profitable e-auction segment. Although e-auction prices remain higher on a YoY basis, they have just begun to cool off from the peak. 

An increase in the number of days of inventory maintained by power plants, coupled with softening global coal prices, could disturb the offtake for CIL, going forward. Benign global prices allow companies an option to import coal rather than procure domestically. 

Data by Kotak Institutional Equities suggests that e-auction premiums have, accordingly, declined to 75 per cent in March, from 84 per cent last month. Hence, volume impetus remains crucial to fill the void created by falling coal prices. 

Notably, e-auction sales were down 33 per cent YoY for the first nine months of FY19. Nonetheless, this hasn’t hampered e-auction revenues yet, which has remained flat (up 0.5 per cent YoY), thanks to a 50-per cent YoY improvement in e-auction realisations. 

 

On the production front, Mahanadi Coalfields, among CIL’s largest subsidiaries, sustained volume growth on account of better evacuation infrastructure and resolution of certain local issues. 

Another subsidiary, South Eastern Coalfields, witnessed a 13.6-per cent YoY decline in April, owing to lower production from underground mines. Analysts expect a rebound in volumes, though the Street will remain cautious on the growth trajectory.

Meanwhile, the upcoming March quarter results are unlikely to be strong for CIL. 

Analysts at Motilal Oswal Securities expect net profit to decline 12 per cent YoY as earnings before interest, tax, depreciation, and amortisation may fall 22 per cent due to higher costs. 

E-auction realisation is estimated to rise 24 per cent to Rs 2,619 a tonne, though volumes may dip 24 per cent to 22 million tonnes, nullifying the benefits of higher realisation. 

The CIL stock has gained about 18 per cent from its 52-week low, thanks to continued divestment by the government. Analysts believe that if supported by volume growth, there could be more upside in the counter.