Coal India cuts FY15 volume estimate to 507 mn tonnes

Viability of independent power producers to deteriorate further, as plant load factors hit 60%

Coal India Ltd (CIL) has conveyed to analysts its FY15 coal output will be lower than the earlier projection of 530 million tonnes (mt). Irrespective of what the government says, environmental clearances continue to be a problem and this will cap FY15 coal production at 507 mt, which would be a 25-30 mt growth over the current financial year. This implies CIL’s output in FY14 will be no more than 470-475 mt. At the start of the current financial year, CIL had estimated its FY14 production to be 492 mt.

Due to environmental hurdles, the company’s coal output stayed flat in FY11 and FY12. After much effort, volumes grew 3.8 per cent in FY13 and by a modest figure in the first nine months of the current financial year. Morgan Stanley says while volumes have grown modestly, dispatches have been outpacing production, as inventory is being liquidated.

Dispatch growth was 7.4 per cent in FY13, while production grew 3.8 per cent. Following a cut in its volumes guidance, Edelweiss Capital has revised CIL’s volume estimates for FY15 and FY16 to 496 mt and 521 mt, respectively, from the earlier 510 mt and 536 mt, respectively. The target price and rating on the stock following the new volume guidance has been cut by several brokerages.

Currently, CIL’s supplies only meet 80 per cent of the power sector’s coal requirements. The shortfall in output, both for this year and the next, not only has implications for the company’s earnings but also for the power sector. Analysts believe the situation is rather grim for the power sector, despite several measures being announced to revive the sector. No meaningful improvement is expected before another two to three years.

Hence, plant load factors of all independent power producers will remain at 60 per cent levels. With fuel costs rising, due to blending of more expensive imported coal, low merchant tariffs and uneconomical power purchase agreements, the economic viability of these power plants have deteriorated, says Parag Gupta of Morgan Stanley in a note.

Analysts are underweight on most independent power producers as a result, as not much change is visible on the ground despite several announcements.