‘Non-power sales rise is positive for CIL earnings’
Coal India’s first half FY24 production at 333 MT rose 11.3% year-on-year while total supplies also shot up to 360.7 MT during first half, marking 8.6% y-o-y growth.
Coal India Ltd (CIL) that has seen an over 26% surge in stock prices since August-end also scaled 52-week highs on the BSE on Tuesday. Though strong production and sales volume numbers for September helped to build confidence in the company achieving annual growth guidance, it is rising supplies to non-power sector that will help the improvement in blended realisations and profitability.
Coal India’s first half FY24 production at 333 MT rose 11.3% year-on-year while total supplies also shot up to 360.7 MT during first half, marking 8.6% y-o-y growth.
The strong momentum in production has increased confidence in the company being able to achieve its production guidance, said Abhijeet Bora, Sharekhan analyst. Rising production will also contribute to operating efficiencies, which is another positive, he added. Notably the volume growth momentum has remained strong despite the second quarter being seasonally weak owing to the monsoons. Also, the company’s large subsidiaries like South Eastern Coalfields Ltd (SECL) are driving production and dispatches growth, which is positive. CIL’s production and off-take for 2023-24 is targeted at 780 MT. Of this, 610 MT is for meeting the power sector’s demand.
While the company is meeting its supply requirements to the power sector, the bigger positive is rising volumes to the non-power sector. The company supplies the majority of its produce to the power sector based on Fuel Supply agreements (FSA), which are fixed rates supply contracts, but the supplies to the non-power sector where it earns higher realisations also are rising. The company’s supplies to the non-power sector during the first six months of FY 2024 stood at 65.7 MT clocking 40% growth, as per the company.
“With wage hike concerns largely over, the benefit of operating leverage (6-7% per annum volume growth) and better-blended realisation bode well for Ebitda margin (to sustain in the range of ₹410-435/tonne) of Coal India”, said Sharekhan’s Bora. Ebitda stands for Earnings before interest tax depreciation and amortization.
The benefits to Coal India are also likely to accrue as a strong pick up in power demand, is also leading to rebound in the e-auction realizations, highlighted Rupesh Sankhe, senior analyst at Elara Securities India Pvt Ltd. Coal sales in the open market after meeting FSA supplies are made through e-auctions. As per Sankhe the e-auction realisations that had fallen to around ₹2500 a tonne levels in the months of June-July have risen to around ₹3200 a tonne level now since the power demand improved and touched a peak in September. The e-auction premiums have recovered to 60-70%.
Though e-auction realisations and premiums on year-on-year basis may still be lower, as coal prices had risen to abnormal levels during 2022, recovery from lows in June -July however is positive. Some benefits to Coal India may also accrue because of rising coking coal prices, though Coal India predominantly produces thermal coal .
Taking cognizance of higher-than-expected sales volume and favourable e-auction price outlook, ICICI Securities has raised earnings estimates for FY24/FY25 by 15–16%.
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