Coal India: Weathering weak news flow

Soft demand from power sector remains factored in, but rising prices to push up e-auction realisations

Coal India - despite weak June quarter results that were impacted due to soft realisations, soft production and supply numbers for August - has stood firm around Rs 333 levels. Analysts say, while demand for coal from power sector remains soft and therefore realisations and off-take, most of it is priced in and hence, there is limited downside risks to earnings estimates.

Analysts at Religare Institutional Equities said the June quarter was weak but further downside remains capped. For the June quarter, Coal India’s (CIL) operating profit fell 11 per cent short of consensus estimates, due to decline in FSA realisation (coal supplied to power sector under fuel supply agreement or FSA, which is typically at subsidised prices). The power sector off-take of higher-grade coal in the June quarter had also been soft.

However, analysts at Edelweiss say this was before price rationalisation by CIL towards the end of May and the cost of operations have also fallen. CIL had rationalised prices of various grades of coal to remain competitive, which led to a 6 per cent increase in FSA price. This price rationalisation can accrue about Rs 3,200 crore in revenue, estimate analysts.

Also, post rationalisation of prices, product mix has improved and will help blended realisations. The tepid demand scenario from power sector, however, may keep volume growth muted in near-term. The same was also visible in August numbers, wherein coal dispatches declined 9.6 per cent year-on-year to 36.7 million tonnes (mt), thus April-August remained flat at 211 mt.

However, analysts at Motilal Oswal said the sluggishness in dispatches is temporary. With the government focussing on cutting coal imports and given the gradual pick-up in discom activity post UDAY scheme implementation, it augurs well of CIL.

Positively, CIL is seeing increasing e-auction volumes. For June quarter, it grew 28 per cent y-o-y; it partly helped offset the 28 per cent y-o-y fall in realisation due to soft international coal prices. Notably, international coal prices in spot market have shot up of late. Even prices of pet coke, used as a fuel alternative, have risen sharply. Thus, e-auction realisations should see some gains hereon.

Analysts say apart from business prospects improving, CIL’s dividend yield of 5.4 per cent lowers the downside risks. Those at Standard Chartered said international coal prices rallied recently (over 30 per cent to $70 per metric tonne since June 2016), which, if sustained, could re-rate the CIL stock upwards.