Improved coal base generation is adding to optimism on Coal India

With the rally in commodity stocks, Coal India Ltd, the country’s largest coal producer, too is seeing its stock prices rebound.

The stock is up more than 13% in the last two trading sessions. Strong demand and higher realizations for commodities such as steel, aluminium, cement and others bode well for demand and realizations of coal, a key input. Besides, the rebounding power sector demand in the country is also supporting coal demand.

Power demand remains crucial for Coal India’s volumes as the majority of supplies under fuel supply agreements (FSAs) are directed towards thermal power production. Earlier, low plant load factors (PLF) of power plants had meant that the volume outlook for Coal India was weak.

In fact, Coal India had missed its FY21 production target of 660 million tonnes (mt). Its production was down by 1% year-on-year (y-o-y) at 596mt. FY21 sales volume were also down 1.3% y-o-y at 574mt.

In April, it showed strong growth in production and dispatches. But this, too, is compared to the low base of last year. Analysts at JM Financial Institutional Securities Ltd said, “On a two-year CAGR basis, off-take growth remained muted at 1.5%, while production fell by 4% in April 2021”.

The good news, however, is that coal stocks at power plants remain healthy (at 12 days), while domestic coal supply is substituting coal imports (a growth of about 31% y-o-y in January 2021), suggests JM Financial data.

The improving PLF of thermal power plants is leading to more optimism. Rupesh Sankhe, an analyst at Elara Capital said coal-based power generation is showing improvement. PLF is at about 65%, compared to 45% a few months ago.

Further, e-auction premiums (over and above the notified price) may also see improvements in line with the rising power demand. International coal prices are already on the rise.

Improved power demand, e-auction premiums and export substitution are key to Coal India’s future prospects. The company’s efforts on export substitution to grow volumes need to be watched carefully.

Meanwhile, for the quarter ended March, analysts expect Coal India’s offtake to be flat on a y-o-y basis. Ebitda (excluding over burden removal) is expected to mark a decline of 39% y-o-y, suggests Motilal Oswal Financial Services Ltd in its results preview.

This is owing to lower realizations (both FSA and e-auction), they add. They expect e-auction realizations during the March quarter to be lower by 24% y-o-y. Overall, the brokerage expects net profit to decline by 31% y-oy to ₹3,180 crore in March quarter.