Strong volume recovery likely to drive upgrades for Coal India's stock

The introduction of "Singrauli Punarasthapan Charge" of ₹300 per tonne across all mines by Coal India’s (CIL) subsidiary Northern Coalfields (NCL) from May 1 is expected to drive an estimated additional revenue of ₹3,880 crore.

 

The levy is 2.5 per cent of FY26 revenue and implies up to 8 per cent upgrade to FY26 earnings. It translated to an effective price increase of ₹50 per tonne (3.5 per cent) on overall fuel supply agreement (FSA) coal of 734 million tonnes estimated for FY26.

 

NCL is the third-largest subsidiary with sales of 138 million tonnes in FY24, contributing 18 per cent of CIL’s total sales volume. The cash inflow is likely to be used to fund upcoming land acquisition and rehabilitation programme at one of the mining areas in Singrauli. The estimated capex of ₹17,000 crore each in FY26 and FY27 incorporates upcoming capex on the Singrauli area.

 

CIL has faced headwinds from softening international thermal coal prices (and therefore pressure on e-auction premiums), market-share loss to captive production, weaker production growth and evacuation via rake movement. So this is a positive development.

 

The last general price hike under full volume of FSA took place in January 2018. The last price increase for CIL was in May 2023, when it increased the price of high-grade non-coking coal by 8 per cent, yielding additional revenues of ₹2,700 crore. The next wage revision is due in June 2026 and this hike may signal that CIL would be looking to take price hikes when costs increase.

 

Given softer prices and captive production, CIL has seen lack of volume growth (April’24-January’25 volume up 1.8 per cent Y-o-Y to 630 million tonnes). The decline in e-auction has pressured cash earnings with adjusted operating profit for 9MFY25 down 18 per cent Y-o-Y to around ₹19,000 crore.

 

In 9MFY25 there’s been modest volume growth (1.5 per cent YTD) and weak realisations (down 4.9 per cent Y-o-Y) due to a decrease in 9MFY25 e-auction rates to ₹2,514 per ton (down 23.9 per cent Y-o-Y). The weakness in realisations also extended to FSA realisations, which came in at ₹1,514 per tonne (down 1.2 per cent Y-o-Y).

 

However, Q3FY25 indicated higher coal offtake (up 9 per cent Y-o-Y to 191 million tonnes) and better average selling prices or ASP at ₹1,725 per tonne, which led to revenue growth of 3 per cent Y-o-Y (10 per cent Q-o-Q). Total operating expenses stood almost flat which led to operating profit beat of the consensus.

 

E-auction prices jumped by 17 per cent Q-o-Q to ₹3,321 per tonne (still down 34 per cent Y-o-Y on a high base of last year). E-auction premium over FSA stood at 117 per cent vs 84 per cent in Q2FY24 but e-auction volumes, however, stood at 16 million tonnes (flat Q-o-Q) below estimate. FSA prices stood at ₹1,532 per tonne, up by 3 per cent Y-o-Y.

 

CIL has ambitious supply targets of 780 million tonnes, 850 million tonnes and 1,000 million tonnes for each year over FY24-26. Until January 23, CIL coal production stood at 610 million tonnes (up 11 per cent Y-o-Y) and and offtake at 620 million tonnes (up 8 per cent Y-o-Y), implying 11 per cent Y-o-Y growth in production and 31 per cent Y-o-Y growth in offtake to achieve the 780 million tonnes target. This is likely to be missed. In future, CIL has to look forward to around 31 GW of under-construction coal-based capacities on top of an existing asset base of 217 GW, which could drive demand. However, production will need to catch up.

 

While valuations are modest and the dividend record is attractive, there is modest volume growth and impending cost pressures. Investors will also look at the accounting context of contribution of overburden reversal, adjusting for which valuations are higher. Any sustained volume recovery could trigger upgrades.