Coal India: Volume increase key for earnings upside amid falling prices

Falling international coal prices are a risk to e-auction premiums

Since its highs a month-and-a-half ago, Coal India has been trending weak, hitting its 52-week lows recently. The current infirmity in the stock follows the government’s decision to offload 2.21 per cent stake in the company. 

Earlier, the government had sold a 3 per cent stake through an offer for sale, indicating an option to offload a further 6 per cent on over subscription.

Analysts said since the government had indicated a stake sale of up to 9 per cent and only 3 per cent had taken place initially, the stake sale overhang continued and would likely remain. 

The recent weakness can also be attributed to the soft November production and sales numbers reported by the company. While sales in November grew just 0.6 per cent, production, too, was muted at 1.6 per cent. 

The muted numbers have been highlighted by the government as the company may not be able to achieve its targeted production and sales numbers.

Analysts are positive that the company's sales would pick up, considering its efforts on de-bottlenecking and the low inventory levels at power plants. 

But, it needs to be watched for now.

On the profitability front, factors that affected it last year such as wage provisioning, grade slippages, among others, are behind it. 

The company is also benefitting from its earlier non-coking coal price hikes as well as increase in evacuation facility charge. 

However, declining international coal prices are adding to concerns.

This can put pressure on strong e-auction premiums the company has been commanding because of robust demand in the country. 

The more profitable e-auction realisations rose 61 per cent, year-on-year, and 8 per cent, sequentially, to ~2,592 during the September quarter.

Hence to compensate for any softening in e-auction premiums, volume growth needs to remain strong.

  

Analysts at Edelweiss, too, say while their FY20 e-auction premium estimate is lower at 85 per cent (currently about 98 per cent), they see volume increase as one of the important drivers of company’s profitability in the event of e-auction prices falling further.