Coal India’s earnings to get a boost from e-auction premium, volumes
Coal India Ltd’s (CIL) shares are 7% below their 52-week high of Rs359 apiece seen in mid-November. Still, there is optimism on earnings outlook owing to volume growth and better e-auction realizations.
The coal producer has a production and sales offtake target of 780 million tonnes (mt) each for FY24. This means CIL would have to clock 10% and 16% growth, respectively, in the remaining months to meet its production and offtake targets. The company expects offtake to pick up in the second half of FY24, partly aided by seasonality (lack of monsoon). In a recent investor call, the company’s management said it expects demand for coal to be strong in the coming years. CIL’s production target for FY25 is 850 mt.
Apart from volumes, the trend in e-auction price realisations is a crucial variable. The company sells coal through two main routes–fuel supply agreement (FSA) and e-auction. The realisation of e-auction coal is typically higher than that of FSA, which is heavily discounted to keep electricity prices low, said Amit Dixit, an analyst at ICICI Securities.
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In the September quarter (Q2FY24), CIL’s e-auction realization fell to Rs2,838 per tonne, marking it the fourth straight quarter of drop in the measure, reflecting the fall in international coal prices. E-auction premium to FSA price fell to 84% in Q2, but has now risen to 90%. For perspective, this was 144% in Q1 and a high of 329% in Q2FY23.
What has kept the optimism alive despite the drop in e-auction premiums in Q2 is CIL managing to clock a 12% year-on-year growth in Ebitda. This was led by higher offtake and lower input costs. CIL’s Q2 results challenge the common belief that e-auction prices alone dictate the company’s profitability, said Dixit.
Nonetheless, the e-auction premium is expected to inch higher in the coming months. “E-auction premiums mimic the trend in international coal prices, which have started moving higher from October after hitting a low in July,” said Rupesh Sankhe, an analyst at Elara Securities. “Additionally, peak power demand amid increasing incidences of power shortages has strengthened the demand outlook for coal.”
Nuvama Institutional Equities predicts an 118% e-auction premium for October with higher volumes to drive earnings in H2. CIL is targeting an e-auction volume of 15% of production in H2. Further, any potential rise in FSA prices could buttress CIL’s earnings. FSA prices were up 9% year-on-year at Rs1,542 per tonne in Q2 due to higher supply to the non-regulated sector.
Meanwhile, employee cost is a huge burden for CIL, and it expects about a 5% drop in staff count every year over the next 5-10 years. Moreover, the coal major is actively enhancing rail infrastructure to accommodate an expected rise in volumes.
To be sure, the sharp 46% gain in CIL’s shares in the past year suggests investors are factoring in the brighter picture adequately. But investors should closely watch e-auction and FSA prices, along with delivery on volume growth.
