Auction premium, hike in prices may boost Coal India

The coal producer’s sales volume in November grew 10.8% compared to the same month last year. During April to November 2021, sales grew at a faster rate of about 18% on a year-on-year basis. This was partly helped by a favorable base, given that there was a 1.8% decline in volumes during April to November 2020.

Overall, a strong jump in power demand has not only boosted CIL’s sales this year, but has also helped in clearing high inventories. A major part of its supply is directed towards the power sector under fuel supply agreements (FSAs). It produced 59.6 million tonnes (MT) of coal in FY2011, but ended the year with an inventory of around 100 MT as electricity demand in India remained weak.

A pick-up in power demand has helped the sales performance in the current fiscal, but there is gloom on the production front. Coal production grew just 4% year-on-year in November and 5.6 per cent in April-November. As such, the production run rate is soft. For FY22, the company’s coal production target is 640MT and production in April-November is 353.4MT. The company needs to see a relatively higher run rate for the remaining four months of FY12 to meet its target.

Meanwhile, strong demand has prompted CIL to raise its FY22 offtake guidance to 660-670MT. It helps that demand is strong. In addition, higher international coal prices will support the company’s domestic sales. End users who depend on imported coal may consider purchasing more domestic coal, as international prices are quite high.

According to Edelweiss Securities Limited, the pithed inventory of CIL has now come down to around 29MT. The brokerage firm expects the company to complete its projected FY22 off-take of 643MT, which would mean a 12% growth in sales volume this fiscal. Note that amid favorable demand conditions and a high international coal price environment, investors were naturally anticipating strong growth in realizations. However, much to the dismay of investors, that hasn’t played out in the half-year ended September.

The e-auction receipts of Coal India were not very encouraging. Further, e-auction volumes remained low as power plants were directed to supply more due to low inventory levels.

Unsurprisingly, the stock is down about 22% from the highs seen on October 6. For perspective, the e-auction receipts in Q2FY22 were as follows 1,594/tonne, which translates to a premium of only 15.3% over fuel supply agreement prices. In Q1, the e-auction premium was 12.5%.

Analysts expect the e-auction premium to improve significantly in the second half. “The management highlighted that the current premium is over 50%,” analysts at Motilal Oswal Financial Services Ltd said in a report on November 25. If the current e-auction premium continues, they see room for a hike in their FY22 estimate, provided volume growth.

Coal India is also looking to increase the price of coal supplied under FSA. These increases are significant to offset the impact of expected wage increases and the anticipated impact on profit margins.

Meanwhile, CIL recently declared interim dividend of 9 per share. Given the strong balance sheet and cash accretion, analysts expect a dividend yield of 11%. CIL has cash balance 30,000 crores. Analysts said this should support the fall in its shares. Analysts at Motilal Oswal said, “Surge in demand for coal from the power sector, which may reduce supply to non-regulated sectors through e-auctions, remains a major risk as it could hurt profitability. “