What the latest FSA price hikes mean for Coal India investors | Mint

What the latest FSA price hikes mean for Coal India investors

Post market hours, the company announced that the government is looking to sell up to 3% stake in CIL through an offer for sale (OFS) at a floor price of 225 apiece
Post market hours, the company announced that the government is looking to sell up to 3% stake in CIL through an offer for sale (OFS) at a floor price of 225 apiece

Summary

The state-run company has raised the price of high-grade coal—G2 to G10—by 8% with effect from 31 May. But the price hike did not move the needle for the stock—CIL’s shares closed 1% lower on Wednesday to 241.25 apiece on the NSE.

For the Coal India Ltd (CIL) stock, an increase in the price of coal sold through fuel supply agreements (FSA) was expected to be a key trigger.

The state-run company has raised the price of high-grade coal—G2 to G10—by 8% with effect from 31 May. But the price hike did not move the needle for the stock—CIL’s shares closed 1% lower on Wednesday to 241.25 apiece on the National Stock Exchange.

Post market hours, the company announced that the government is looking to sell up to 3% stake in CIL through an offer for sale (OFS) at a floor price of 225 apiece.

Graphic: Mint
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Graphic: Mint

The OFS is likely to weigh on the stock this week.

Coming to the latest FSA price hike, this is the first big revision after 2018. This boosts CIL’s realization, and hence, margin.

But the revision in FSA price is restricted only to high-grade coal, which formed about 30% of overall volume in FY23, say analysts.

Given this, the company expects to earn incremental revenue of 2,703 crore in the remaining period of FY24.

This constitutes only about 2% of CIL’s consolidated revenue in FY23.

To be sure, the FSA price hike is expected to partly compensate for the 19% spike in non-executive wages that CIL announced recently. Moreover, “As employee cost is about 50% of overall cost, CIL will have major operating leverage advantage with volume growth," said analysts at Nuvama Research in a report on 30 May.

As such, it is crucial for CIL to see consistent volume growth. CIL also sells coal through the e-auction route. Here, the e-auction premium over FSA prices is softening, which is a point of worry. Recall that the strong upward trajectory of e-auction premium had supported earnings in FY23.

“CIL’s profit growth in FY24 does not appear promising given the base year had windfall gain. To make matters worse, costs are rising while there is not much boost to revenue. For instance, the e-auction premium is narrowing rapidly," said Rohit Natarajan, an analyst at Antique Stock Broking.

To put that in numbers, in April, CIL’s premium was about 137%, down from 278% seen in January, he added.

It remains to be seen if an increase in e-auction volume offsets this fall. Shares of CIL are up by about 7% in 2023 so far. With lower-than-expected revision in FSA prices, rise in employee cost and softening e-auction prices, meaningful triggers for CIL stock appear few and far between.

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