OPEN APP
Home / Market / Mark-to-market /  Could Coal India become a victim of its own success?

Coal India Ltd (CIL) has been recording impressive production growth every month this fiscal year, compared with its dreary historical performance. But could lower demand from the power sector prove to be a party pooper?

The company’s production for December increased 10.8% year-on-year (y-o-y). Offtake (or sales volume) growth, however, remained stagnant at 9.7% y-o-y, missing the target of 12.7% given already high stocking at power plants and hence lower coal demand, Subhadip Mitra, analyst at JM Financial Institutional Securities Ltd, wrote in a note to clients.

“6.8% growth in CIL supply to power sector in the 9 months of FY16 (Apr-Dec15) is higher than 6.5% growth in coal based power generation, indicating high coal stocking by power plants," Mitra pointed out, adding that the all-India coal stock at power plants according to the December 2015 Central Electricity Authority report is 24 days versus the normative requirement of 21 days. In comparison, the inventory in December 2014 was a mere nine days of coal stock.

After outperforming the benchmark Sensex initially this year, the CIL stock has underperformed in recent months. Currently, the stock trades at 12 times its estimated earnings for the next fiscal year.

While consistent efforts to boost production in the form of expediting project clearances have helped, lower coal demand from the power sector seems to be emerging as a worry. On the brighter side, the next few months are usually seasonally stronger and could, therefore, help CIL’s offtake growth. However, in several recent months, offtake has been higher than production growth. Whether the current build-up in inventory is an aberration, therefore, remains to be seen. Faster-than-expected pace of economic recovery too could fuel coal demand.

Investors must also watch out whether production growth momentum sustains. CIL’s higher production has played a role in reducing coal imports to India this fiscal year. According to Chirag Shah, director of equity research at Barclays Capital, coal imports to the country have declined 12% for April-November 2015 on a y-o-y basis. India imported 212 million tonnes in FY15.

“Coal India’s higher production could very well be helpful to create import replacement demand in the coming years and thereby lower imports further. However, how demand plays out will also be an important factor to watch out for in determining coal imports," added Shah. For now, CIL’s problem of plenty is a boon to the country.

The writer does not own shares in the above-mentioned companies.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Close
Recommended For You
×
Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout