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Higher global prices of coal in the March quarter (Q4FY22) were expected to boost Coal India Ltd’s (CIL’s) e-auction realization thus benefitting the state-run company. This has played out. E-auction realization premium over the average realization of coal sold through the fuel supply agreement (FSA) route was 65% in Q4, rising from 42% in Q3.

CIL’s adjusted Ebitda, excluding the stripping activity adjustment expense, rose by 56% year-on-year (y-o-y) to 12,468 crore in Q4. Ebitda is earnings before interest, taxes, depreciation and amortization. The company’s adjusted Ebitda per tonne is at a record high of 692 in Q4, according to analysts at Motilal Oswal Financial Services.

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It helps that the e-auction premiums are expected to stay firm ahead mainly because of the lower-than-normal coal inventory at non-pithead plants.

That said, a key monitorable for CIL remains the much-awaited FSA price hikes. FSA prices were last raised in 2018. An adequate increase in FSA is important to compensate for pending wage hikes. In its Q3 earnings call, the company’s management had indicated that negotiations for wage revision might conclude only by the end of FY23.

“The employee expectations of wage hike during the initial round of negotiations are high, which is of course, the usual case. In the course of further negotiations, they are likely to find a more moderate ground," said Rohit Natarajan, analyst at Antique Stock Broking Ltd. The initial wage hike ask from trade unions is a steep 50%. Now, while the e-auction realizations track international coal prices in the coming days, domestic issues will be in the spotlight soon.

“The other concern is FSA hikes, where the ministry has to juggle between the needs of discoms and CIL’s profitability," said Natarajan.

Progress on this would be crucial, but the CIL stock has staged a good show so far this calendar year, rising by 25%, beating the benchmark index Nifty50, which has given negative returns. Even so, the stock is down 12% from its 52-week high of 209 apiece seen on 22 April. Analysts attribute the stock’s recent weakness to issues such as the expected wage hikes.

Meanwhile, in FY22, CIL’s coal production rose by 4.4% y-o-y to nearly 623 million tonnes. In FY23, it plans to achieve production of 700 million tonnes.

“Volume growth is not an issue for CIL. Other positives are improving working capital and receivables position, decent dividend in FY22, but a threat to profitability could come from wage hikes," said an analyst requesting anonymity. Even as CIL shares have outperformed so far in 2022, in the long-run, environmental, social and governance concerns may not keep investor interest too high.

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