Muted volumes, falling e-auction premiums likely to hurt Coal India

Coal India (CIL) continues to trend lower on the bourses, down more than 13 per cent in July. Muted June quarter offtake, the start of a seasonally weak September quarter, and weakness in international coal prices, have all impacted Street sentiment.  

The government’s announcement in the Budget regarding increased divestment targets will be an overhang on the stock. In addition, the government is planning to auction more than 41 new coal blocks. This is also looked upon with concern, given it may lead to competition for CIL, say analysts. 

The firm’s flattish production and sales numbers for the June quarter is not encouraging, given the fact that it was targeting production of 660 million tonnes (up 9 per cent year-on-year) in FY20. Not much is expected in the seasonally weak September quarter, given the impact of rains on production and dispatches. 

Analysts at ICICI Securities believe volume growth will be the key monitorable, keeping in mind the flat production trend during first couple of months in FY20. 

The falling global coal price is affecting the more-profitable e-auction premiums. Cheaper imported coal prompts players, with higher accessibility to ports, to buy external coal thus reducing demand in the country. 

Analysts at Motilal Oswal Financial Services expect average e-auction realisations to decline by about Rs 400 per tonne in FY20, on the back of higher domestic availability and lower international prices. 

The only silver lining for the company is falling inventories at power plants (at 15 days now, compared to about 20 days in March-April), with the monsoon expected to curb supplies further. 

October 2018 had seen coal inventories fall to six days at power plants that had led to a spike in demand, and also improved e-auction premiums. If the trend repeats, it could provide some respite.

Given the higher divestment target, stake sale is another headwind for the company.  The government’s shareholding stands at 70.96 per cent, which is expected to be reduced. Further, the plan announced for the auction of 41 coal blocks will also be a worry. 

Analysts say that though past auctions have not been encouraging, it could lead to competition for CIL if successful.