A key factor that boosted Coal India Ltd’s (CIL) earnings last year is losing steam. As the chart alongside shows, CIL’s price realization for coal sold through the e-auction route touched a high in the quarter ended September 2022 (Q2FY23). Back then, the e-auction realization was higher by as much as 330% compared to the realization of coal sold through fuel supply agreements (FSA). However, this tailwind is now fading away. E-auction realizations are anchored around international coal prices, which have been on a downtrend this year.
Against this backdrop, CIL’s e-auction realizations have fallen consistently over the past three quarters on a sequential basis. In Q1FY24, the premium of e-auction realization over FSA stood at 144%. What is more, analysts at Jefferies India see further downside to e-auction realizations as spot global prices are 17% below the June quarter average.
Add to that, the chances of a further hike in FSA prices appear slim. CIL had raised prices of some grades of coal with effect from 31 May. “Despite the recent FSA price hike, we see CIL’s blended realizations falling 3%/1% in FY24E/FY25E,” said a Jefferies report dated 8 August. For perspective, the blended realization in Q1 is down by 3.3% year-on-year.
Given this, volume performance becomes crucial. For the first four months of FY24, CIL has clocked year-on-year growth of 6.3% in its offtake volume to 246.5 million tonnes. It remains to be seen if the company meets its offtake target of 780 million tonnes in FY24. In Q1, FSA volumes share stood at about 90% and they cater to the power and non-power sector. Higher supplies to the non-power sector aid the FSA realization and thus, overall revenue. In the monthly update for July, CIL noted that supplies to the power sector have stabilized and there is no pressure of criticality at plants. Thus, it could meet the demand of the non-power sector.
Even so, some analysts expect CIL’s FY24 revenue to drop year-on-year. True, the company’s consolidated Q1 revenue rose year-on-year but the rate of growth is much slower than 26% seen in FY23. In fact, CIL’s profit is also likely to decline in FY24. Higher employee costs on the back of wage revision would weigh on Ebitda (earnings before interest, tax, depreciation, and amortization). In Q1, employee costs were higher by 19% year-on-year and thus Ebitda margin dropped significantly.
“We currently factor quarterly wage bill of ₹13,000 crore for the remainder of FY2024 that would act as a further drag on earnings in subsequent quarters,” said a report by Kotak Institutional Equities dated 8 August.
To be sure, the CIL stock is looking at a muted 2023 after having a stellar run in 2022. Recall that the share prices had risen as much as 54% last year. So far in 2023, CIL’s shares have gained a much lower 4.3%. The stock has also been bogged down post the offer for sale in May.
As such, meaningful upsides may be capped. At the same time, returns could look better thanks to the attractive dividend yield. In FY23, CIL’s cash from operations was ₹35,700 crore. This peak cash generation could be hit as e-auction premium declines.
“Even then, CIL could sustain ₹25,000 crore in cash generation as against the capex needs of ₹16,500 crore in FY24E. Thereby, the residual cash of ₹9,000 crore could be doled out as dividends-translating into ₹15 per share,” said analysts at Antique Stock Broking in a report on 9 August. In FY23, the dividend per share stood at ₹24.25.
Investors would do well to track the monthly volume numbers and the international coal prices trajectory.
According to Jefferies, “Longer-term concerns around ESG as well as capability to deliver sustainable volume growth and take continued linkage price hikes remain.”
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Updated: 09 Aug 2023, 10:58 PM IST