Next step, Coal India mines for volumes

CIL’s management has indicated that e-auction premium has fallen sharply in the ongoing quarter.
CIL’s management has indicated that e-auction premium has fallen sharply in the ongoing quarter.

Summary

Moving forward, besides monitoring e-auction premium trend and employee cost, which is a large part of the cost structure, execution should be closely tracked for CIL.

Coal India Ltd’s (CIL) realization from coal sold through the e-auction route picked up sequentially in the three months ended December (Q3FY24), after falling for four straight quarters.

The e-auction premium over coal sold through fuel supply agreement (FSA) prices stood at 117% in Q3 against 84% in Q2 aided by higher global coal prices. But it’s too soon to rejoice this as e-auction realization are poised to drop sequentially in Q4.

 

In a conference call with analysts on Monday, CIL’s management has indicated that e-auction premium has fallen sharply in the ongoing quarter. However, this could be offset by a higher share of e-auction volume. The management has pointed out e-auction volume can contribute about 15% of the overall pie in Q4.

For FY24 and FY25, CIL has trimmed its overall production and offtake guidance to 770 million tonnes (mt) and 838 mt, respectively, from 780 mt and 850 mt, earlier. For the nine month ended December (9MFY24), production and offtake stood at 532 mt and 552 mt, respectively. During the period, offtake grew almost 9% year-on-year. Out of this, FSA volume contributed 89.5% of total volumes, whereas e-auction formed 8.6% of total.

Overall, the company sees favourable demand from sectors such as power and steel. CIL is taking several measures to support its production targets such as using the MDO model (mine developer operators) for greenfield and brownfield mines; and FMC (first mile connectivity) projects for evacuation efficiency. Further, it has adopted latest technology for faster evacuation and transport along with focus on exploration, highlights Aditya Welekar, analyst at Axis Securities.

Coming to the recently concluded Q3 results, lower input costs and flat employee expenses led to better-than-expected Ebitda (excluding overburden removal) of 11,900 crore, up 6% year-on-year. Overburden removal is a provisional cost for removing dirt and impurities while extracting coal.

Along with factoring in lower cost of production, Centrum Broking analyst has built in higher volume by 3.5% and 4.5% leading to a 23% and 28% increase in Ebitda estimates for FY25 and FY26, respectively. “High profitability will ensure enough cash after capex (FY24-26: free cash flow of 19,000 crore- 28,000 crore per year) for higher dividend," said the brokerage.

In recent years, CIL has increased its focus on capital expenditure (capex) to improve its evacuation infrastructure and cater to long-term demand growth. Capex target for FY24 stands at 16,500 crore and provisional capex for 9MFY24 is 13,441 crore.

Against this backdrop, CIL’s shares have more than doubled in the past one year. The significant rally suggests investors are factoring in the brighter picture adequately. Hereon, further upsides may hinge on CIL meeting its volume targets.

Analysts from Kotak Institutional Equities find it hard for CIL to grow earnings from the current base. In FY23, CIL benefited from higher auction realizations with lower provisioning for employee costs. Plus, e-auction realization has decreased substantially from the peak seen in Q2FY23. Further, price hikes in fuel supply agreement are not round the corner anytime soon.

“On the volume front, India has 27 GW of coal-based capacities under construction on an existing base of 213 GW, implying 12% absolute growth in the next five years, while employee cost will rise linked to inflation, and provisions will start impacting by FY27E," said Kotak’s analysts.

CIL’s shares currently trade at around six times enterprise value/Ebitda for FY25. Moving forward, besides monitoring e-auction premium trend and employee cost, which is a large part of the cost structure, execution should be closely tracked.

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