Home / Markets / Mark To Market /  Auction premiums, price hikes could fuel Coal India

Coal India Ltd’s (CIL’s) latest monthly production and offtake (or sales volume) data is not particularly striking, but it is not bad either.

The coal producer’s sales volumes in November rose by 10.8% from that of the same month last year. Sales during April to November 2021 are up at a faster rate of almost 18% year-on-year (y-o-y). This was partly helped by a favourable base, given that volumes had declined by 1.8% y-o-y during April to November 2020.

Overall, the strong surge in power demand has not only boosted CIL’s sales this year, but also helped it clear high inventories. A lion’s share of its supplies are directed towards the power sector under fuel supply agreements (FSAs). It produced 596 million tonnes (MT) of coal in FY21, but ended the year with an inventory of about 100MT as power demand had remained weak in India.

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Not burning brighter

A pickup in power demand has helped volume performance this fiscal, but there is disappointment on the production front. In November, coal output rose by just 4% y-o-y and over April-November, production rose by 5.6%. As such, the production run rate is soft. For FY22, the company’s coal production target is 640MT and production over April-November is 353.4MT. The company needs to clock a relatively higher run rate for the remaining four months of FY22 to meet its target.

Meanwhile, robust demand has prompted CIL to raise its FY22 offtake guidance to 660-670MT. It helps that demand is robust. Moreover, higher international coal prices will support the company’s domestic sales. End-users who depend on imported coal may consider more domestic coal procurement, with international prices being significantly high.

CIL’s pithead inventory has now reduced to about 29MT, as per Edelweiss Securities Ltd. The brokerage firm expects the company to meet its estimated FY22 off-take of 643MT, which would mean a 12% y-o-y rise in sales volume this fiscal. Note that amid favourable demand conditions and a higher international coal price environment, investors were naturally expecting a strong uptick in realizations. However, much to the dismay of investors, that has not played out in the half year ending September.

Coal India’s e-auction realizations were not highly encouraging. Plus, e-auction volumes remained subdued as more supplies were directed to power plants because of low inventory levels.

Unsurprisingly, the stock is down about 22% from highs seen on 6 October. For perspective, e-auction realizations in Q2FY22 stood at 1,594/tonne, which translates to a premium of only 15.3% over fuel supply agreement prices. In Q1, the e-auction premium was 12.5%.

Analysts expect e-auction premiums to improve significantly in H2. “The management highlighted that the current premium is over 50%," said analysts from Motilal Oswal Financial Services Ltd in a report on 25 November. They see scope for an upward revision to their FY22 estimate if current e-auction premiums persist, provided volumes rise.

Coal India is also contemplating increasing the price of coal supplied under FSAs. These hikes are important to offset the impact of expected wage hikes and the anticipated impact on profit margins.

Meanwhile, CIL recently announced an interim dividend of 9 per share. Looking at the strong balance sheet and cash accretion, analysts are expecting a dividend yield of 11%. CIL carries a cash balance of 30,000 crore. This should support the downside for its shares, analysts said. “A surge in coal demand from the power sector, which could squeeze supplies to non-regulated sectors through e-auctions, remains a key risk as it could hurt profitability," said Motilal Oswal analysts.

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