Home >Markets >Mark To Market >Demand slump a bigger risk for CIL than commercial mining

The government’s move to facilitate private sector participation in coal mining, remove end-user restrictions and move to a revenue-sharing mechanism has hit shares of Coal India Ltd (CIL). The stock slumped 6%, closer to its 52-week low. Coal India’s relief of 5,000 crore to customers, lowering the reserve price in auctions and providing favourable credit terms, has further unnerved investors. But the measures alone do not warrant the sell-off.

The first set of measures follows The Mineral Laws (Amendment) Ordinance, 2020, promulgated in January, opening up commercial coal mining to the private sector. Hence, the government’s latest measures are only incremental.

“The government has been fairly transparent about the move to increase private participation. It had sought this earlier as well," Motilal Oswal Financial Services Ltd said. The favourable commercial terms for non-power customers are not out of sync either. Demand has shrunk and customers across industries have reduced coal purchases. This reflects in the 26% year-on-year fall in coal dispatches in April.

Stock shock
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Stock shock

With rising inventories and the upcoming monsoon, Coal India will stimulate demand, offering better price terms, said an analyst at a domestic broking firm. However, the lack of assurance on the opening up of the economy is clouding its outlook.

Power sector offtake has been hit during the lockdown. Thermal power generation fell 28% in April. Coal inventories at thermal power plants are piling up. Against 17 days inventory a year ago, thermal plants have inventories for 30 days, data by Central Electricity Authority showed. This is not to brush away impending competition from the private sector. However, concerns of private competition eroding Coal India’s business are premature. The performance of coal mines auctioned and allocated in 2014-15 have not been encouraging, said Emkay Global Financial Services Ltd.

Land acquisition, environment and forest clearances and procedural delays are major hurdles. “The output from such commercial mines may not be significant for the next three to four years," added Motilal. Further, coal imports continue to rise. In FY19, about 24% of coal was imported, data from ICICI Securities Ltd shows. While Coal India met 62% of the demand, the large import bill leaves room for both the firm and the private sector.

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