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Coal India Ltd’s (CIL’s) earnings for the half year ending September (H1FY23) have set the stage for a solid FY23. The company’s consolidated reported net profit is up by nearly 144% year-on-year (y-o-y) to 14,878 crore. The state-run coal producer has gained immensely in FY23 so far from the spike in prices of coal sold through the e-auction route.

In Q2FY23, e-auction realization touched a record 6,064 per tonne, rising by as much as 280% y-o-y and almost 40% sequentially. The Q2 e-auction realization is 4.3 times the price of coal sold under fuel supply agreements (FSA). The spike in e-auction prices more than compensated for the 63% y-o-y drop in volume.

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Powering through

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Thus, if e-auction volumes were steady, CIL’s overall Q2 earnings could well have been better. In Q2, FSA volume share was at nearly 92% as large quantities were diverted to the power sector. The upshot is that CIL’s consolidated revenue in Q2 rose by 28% y-o-y to 29,838 crore. Reported net profit in Q2 more than doubled.

Little wonder then CIL’s shares hit a 52-week high of 263.40 apiece on Wednesday on NSE. An interim dividend declaration of 15 per share also buoyed investor sentiments. This could mean there is a likelihood of a strong dividend yield in FY23.

Demand conditions are broadly sanguine in the near-term even as power demand could soften with the advent of the winter season. In October, power consumption in India grew just marginally y-o-y. CIL’s offtake in October fell by 5% y-o-y to 53.7 million tonnes. “As can be deciphered from CIL’s October off-take, the initial signs show some fatigue," according to a report by Antique Stock Broking dated 9 November.

Besides, the best for e-auction realization could well be over in the near-term. “In our view, auction realizations have likely peaked as suggested by the rapid decline in prices of imported coal, likely putting a cap on incremental benefits," said a Kotak Institutional Equities report.

Hence, it is vital to raise FSA prices, which were last revised in 2018.

Also, the impending wage hikes necessitate a revision in FSA prices to shield the company’s earnings from falling.

Investors are sitting on handsome gains with the CIL stock having surged by 75% in CY22 so far. The strong rally may cap sharp near-term upsides. Further, there is a looming threat from environmental, social, and governance issues in the long run.

 

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ABOUT THE AUTHOR

Vineetha Sampath

Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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