Rising demand, production recovery could support gains for Coal India

Rising power demand, thermal generation growth and value unlocking at MCL could support Coal India, though margin pressures remain a near-term concern

Coal India (CIL) has seen consensus upgrades on rising power demand. Thermal generation and capacity will grow and there is new interest in coal gasification in the wake of the Iran war. In the short term, CIL valuations may be volatile due to news that the government could divest up to 2 per cent through an offer for sale (OFS) with a floor price of ₹412 per share, implying a big discount to the market price.

 

CIL has also received approval from the Department of Investment and Public Asset Management (DIPAM) for the listing of Mahanadi Coalfields Ltd (MCL) through a fresh equity issuance (IPO) and OFS by CIL, with a target of reducing CIL's stake by 25 per cent. This would unlock value.

 

The Q4FY26 results were a little disappointing, with weak volumes of 199 million tonnes (down 1 per cent year-on-year). Reconciliation and comparison of accounts are difficult due to changes in accounting, which led to the inclusion of levies on coal production and sales in revenues and expenses, and also the inclusion of other operating income in sales.

 

FY26 volumes were 745 million tonnes (down 2 per cent year-on-year), along with a 1 per cent decline in average realisation. CIL has also said it will absorb part of the higher fuel costs in the war scenario, which compresses earnings in the near term.

 

CIL's Q4FY26 net revenue was ₹46,500 crore, up 6 per cent year-on-year and 10 per cent quarter-on-quarter, with average realisations of ₹2,335 per tonne, up 7 per cent year-on-year. Operating profit was ₹12,300 crore, up 8 per cent year-on-year and 57 per cent quarter-on-quarter. The operating profit margin was 26.5 per cent, up 65 basis points year-on-year and 8 per cent quarter-on-quarter. Sales volume of 199.1 million tonnes fell 1 per cent year-on-year and increased 6 per cent quarter-on-quarter.

 

CIL saw a 36 per cent premium in e-auctions over fuel supply agreement (FSA) prices, compared with a 62 per cent premium in Q3FY26 and 69 per cent in Q4FY25. FSA realisations increased 38 per cent year-on-year to ₹2,138 per tonne in Q4FY26. The blended earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne was ₹619, up 10 per cent year-on-year and 48 per cent quarter-on-quarter.

 

Despatches to the sponge iron sector decreased 6 per cent year-on-year and rose 17 per cent quarter-on-quarter to 1.9 million tonnes in Q4FY26. Supplies to power utilities rose 5 per cent, while supplies to steel increased 12 per cent quarter-on-quarter. This was offset by 10 per cent and 9 per cent quarter-on-quarter declines in supplies to captive power plants and cement, respectively.

 

Coal-based thermal generation rose 11 per cent quarter-on-quarter to 329 billion units. Renewable generation grew 15 per cent year-on-year and 20 per cent quarter-on-quarter to 78 billion units, with a share of 17 per cent in generation versus 15 per cent in Q3FY26 and Q4FY25. Q1FY27 has been affected by a heatwave, which has led to higher power demand. That boosts CIL offtake since this is baseload demand, for which thermal power is ideal.

 

CIL is absorbing a rise in input costs due to a surge in prices of explosives and diesel. Ammonium nitrate prices have risen 44 per cent since the beginning of the Iran war, triggering a 26 per cent rise in explosives costs. Industrial diesel prices have jumped 54 per cent. CIL may continue to absorb these costs, leading to margin pressure while protecting downstream users. The impact is hard to quantify, with the duration of the war unknown. If it lasts through FY27, it could increase costs by ₹4,000 crore.

 

Despite elevated power demand, declining coal volumes suggest a shift in consumption, with contributions from captive coal supplies and a rising renewable energy share. But given global trends, prices and realisations could stay elevated, and so could costs.

 

Given the decision to absorb costs, FY27 Ebitda estimates need to be revised down. Other possible risks include lower offtake as captive coal production increases. This could also mean lower e-auction premiums.

 

But coal inventories at power plants are lower at 16-17 days since mid-May, instead of the normal 24 days, as peak demand has surged to record 270 GW levels. In May, CIL reported production output of 56.1 million tonnes (down 11.7 per cent year-on-year) with deliberate cutbacks due to high inventory levels. Volume offtake rose 2.3 per cent year-on-year to 66.7 million tonnes as thermal generation rose 8.3 per cent year-on-year in May 2026, with consumption growing 11.6 per cent year-on-year.

 

CIL should accelerate production as inventories deplete and global supply tightens. CIL could target 815 million tonnes in FY27 despite the slow start to FY27. Net-net, CIL's valuations could rebound in FY27 and the dividend payout also continues to be significant.