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Coal India’s earnings prospects rest on uptick in volume, e-auction premiums

Coal India’s volume trajectory has wavered since last November mainly due to a high base and lacklustre demand from the power sector, say analysts at Edelweiss Securities Ltd. (ANI)Premium
Coal India’s volume trajectory has wavered since last November mainly due to a high base and lacklustre demand from the power sector, say analysts at Edelweiss Securities Ltd. (ANI)

  • Analysts attribute Coal India’s sluggish February operating performance to weak demand from the power sector
  • Weak demand had meant pressure on e-auction premiums and realizations

Coal India Ltd's production and sales numbers during February continued to disappoint, declining by 6.6% and 6.2% respectively.

Though production at SECL, the company’s largest coalfield, increased, the disappointment was led by a decline in production at most other coal fields. Volume growth has remained a key concern of the street.

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Analysts attribute Coal India’s sluggish February operating performance to weak demand from the power sector.

The street, therefore, will be watchful of pickup in demand of coal from power plants. Improved thermal power demand in the country remains crucial for the growth of Coal India’s sales volumes. Analysts expect improvement in economic activities to push power demand, and rising inventory at power plants to drive growth in Coal India sales.

Nevertheless, since thermal power is facing competition from rising renewable power capacities, caution prevails on long-term prospects. Also, competition from private merchant miners over the longer term has been adding to investors' concerns. The company, therefore, has been eyeing import substitution to drive volumes. The company’s efforts to drive volumes continue and the street is eagerly watching for benefits to accrue.

Meanwhile, the street is also eyeing improvement in more profitable e-auction premiums. Weak demand had meant pressure on e-auction premiums and realizations. E-auction realizations during the December quarter fell 44% year-on-year to Rs1,466 per tonne. Hence rebound in the realizations remains eagerly awaited.

Coal India recently approved venture into aluminium value chain (mining-refining-smelting) and solar power value chain (ingot-wafer-cell-module and generation). Though its solar power venture is looked at in positive light, analysts are not greatly encouraged by proposed investment into smelter business looking at the low return ratios the business generates.

Coal India’s volume trajectory has wavered since last November mainly due to a high base and lacklustre demand from the power sector, say analysts at Edelweiss Securities Ltd. They add that e-auction premium crashed to a single digit as the company reduced the floor for bidding. However, analysts now expect an improvement in both volumes to the power sector and e-auction premiums.

The street will be watchful on the same. The company announced a dividend of Rs5 per share on Friday. The good dividend yield of about 7.8% and cheap valuations cushion downside for the stock, say analysts. The stock currently is trading at about 7.2 times FY22 earnings estimates, which is at a steep discount to its historical average of 9x, say analysts.

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