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Informist, Thursday, Jan. 23, 2025

 

By Avishek Rakshit

 

KOLKATA – Despite its focus on green energy, India's dependence on thermal power generated from coal will most likely to continue for over a decade from now. While this is likely to benefit thermal power generating companies like NTPC Ltd., the same cannot be said for sure for fossil fuel mining companies such as Coal India Ltd.

 

Muted sales on account of a mismatch between demand and supply, high pithead coal stocks, stability in global coal prices, and Coal India's diversification plans moving slowly, will all mean the company will be unable to report significant revenue growth even in times of abundant production of coal.

 

For nearly a decade now, the world's largest coal producer in terms of production volume has been focussing on diversification to de-risk itself from coal, but so far, the success hasn't been much. Only the fertiliser plants set up via joint ventures saw the light of the day, and its solar energy projects and thermal power plants are currently being set up. Other plans like the mega aluminium production foray were scrapped. Clean coal production, rare earth mineral mining, and explosive making are still at a conceptual stage.

 

This makes Coal India entirely dependent on coal production and sales and the company usually feels the heat when sales stagnate or don't meet its internal projections. The sales were largely muted in the December quarter.

 

According to an average of estimates from eight brokerages, the Maharatna company is expected to report a modest 1.0% on-year decline in its consolidated revenue to INR 357.8 billion in Oct-Dec. But the net profit is seen falling 15.9% on year to INR 85.2 billion during the quarter.

 

Sequentially, the revenue and profit are seen rising by 16.7% and 35.4%, respectively. The sequential surge is mostly attributable to the seasonality of the business as Jul-Sept coincides with the monsoon when coal mining is disrupted and power demand cools off as well from its summer highs, leading to lower coal sales. The December quarter, on the other hand, coincides with autumn and early winter and usually sees a production surge as workers find it less taxing to mine coal in pleasant weather conditions. Production, however, usually rockets in the March quarter.

 

The company will detail its earnings on Jan. 27.

 

Among the estimates, Motilal Oswal Financial Services Ltd. has projected the highest revenue for Coal India at INR 367.1 billion and Systematix Shares and Stocks (India) Ltd. the lowest at INR 343.7 billion. But surprisingly, Systematix Shares has projected the highest profit estimate for Coal India at INR 109.8 billion. JM Financial Institutional Securities Pvt. Ltd. has projected the lowest profit estimate at INR 65.8 billion.

 

At the current price, the stock is down 16.3% since the company announced its September quarter earnings on Oct. 25. Although the company declared its earnings after trading hours, the stock closed 3.6% down at INR 461.10 on Oct 25. However, it opened lower at INR 452.00, down by nearly 2% on the next trading day and ended at INR 441.65, down 2.3?ter hitting a high of INR 458.00, and a low of INR 435.25.

 

Amid tepid demand for domestic coal, Coal India's sales during the December quarter rose by only 0.7% on year to 193.0 million tonnes and production rose 1.6% on year to 202.1 million tonnes. This mismatch has increased the coal stock with Coal India to 70 million tonnes. Power generation companies do not prefer to stock up coal as they will need to pay upfront for the fuel which would impact their cash flows. Thus, Coal India has to bear the burden of keeping the stock, which is kept at the mines.

 

Coal India's average realisation per tonne of sales could decline by 2% on year to INR 1,690, brokerage Nuvama Wealth Management Ltd. said in a report. While the revenue from long-term agreements, comprising around 80-90% of the volume, could remain stable, or even increase marginally due to improvement in the grades of coal, earnings from e-auction could fall considerably.

 

Axis Securities Ltd. estimated the e-auction premium at 53%, and Motilal Oswal Financial Services pegged it at 60%, down 9% sequentially. Nuvama has projected the premium to fall 19% on year, translating to an effective selling price of INR 2,700 per tonne. However, sales volume through e-auctions could rise 21% on year to 19 million tonnes, Nuvama said. E-auction premium refers to the money Coal India earns in the auctions above the notified coal prices.

 

While the long-term coal supply agreement is the volume driver for Coal India, ensuring a steady stream of revenue, e-auction is the primary determinant of its profit. The bidding in e-auctions starts at a price that is 20% higher than the notified price of coal, which varies according to grades and the mine from which it was produced. If demand is strong, bids could go as high as 300% over the notified price and when demand is muted, the coal offered in the e-auctions is sold at a moderate premium or is left unsold. Coal prices in the long-term agreements, on the other hand, are pre-fixed based on notified prices and the grade and the mine from which it was produced.

 

Thus, while Coal India's production cost is the same for both the coal sold under long-term agreements and e-auction, the latter gets higher revenue which directly adds to its profit.

 

Bidders at the auction comprise an array of buyers ranging from large power, steel and cement companies which need more coal than their agreement with Coal India, as well as medium-small scale buyers from the ferro-alloy industry, coal traders, and others who do not have any purchase agreements with the coal mammoth. A large section of big industrial players also buy high-grade coal at auctions to blend it with the low-medium grade fossil fuel procured under supply agreements.

 

When the landed price of imported coal is higher than the e-auction prices, big buyers bid heavily at Coal India auctions, and when it is lower than the e-auction price, bidding drops, often leading to unsold coal.

 

JM Financial Institutional Securities said Indonesian coal prices were stable in the range of $93-94 per tonne during Oct-Dec and spot coking coal prices fell by $14 a tonne to $197. A large section of Indian importers prefer to use Indonesian coal over other variants.

 

According to Coal India officials, Richards Bay coal prices, which refer to the price of coal futures from the Richards Bay coal port in South Africa and is one of the industry's price benchmarks, increased by 4.5% on year but fell 0.6% sequentially to $106 per tonne during the December quarter leading to muted domestic coal demand in the auctions.

 

Coal India is estimated to report earnings before, interest, tax, depreciation and amortisation of INR 116.3 billion during Oct-Dec, according to the average of estimates from six brokerages. The highest estimate for EBITDA is INR 139.7 billion by Elara Securities (India) Pvt. Ltd. and the lowest is INR 103.9 billion by Motilal Oswal. Coal India does not declare its EBITDA when disclosing its quarterly financial performance. During 2023-24 (Apr-Jun), Coal India reported an EBITDA of INR 517.9 billion, up 8.5% on year.

 

Nuvama said it expects Coal India's EBITDA to decline by 7% on year to INR 111 billion, and EBITDA per tonne to decline by 8% to INR 576. Axis Securities estimated the adjusted EBITDA will decline by 5% on year and Systematix Shares and Stocks said it expects a 3?cline due to lower sales volume and e-auction prices being under pressure.

 

On Thursday, shares of Coal India ended 1.7% higher at INR 385.80 on the National Stock Exchange. 

 

Following are the Oct-Dec earnings estimates for Coal India based on reports from eight brokerage firms in descending order by the estimate of net profit:

 

Broker Name	Net Sales (in million rupees)	Net Profit (in million rupees)	EBITDA (in million rupees)
Systematix Shares and Stocks (India) Ltd	3,43,700.00	1,09,800.00	1,15,800.00
Elara Securities (India) Pvt Ltd	3,66,408.00	1,06,797.00	1,39,658.00
Sharekhan Ltd	3,62,300.00	84,000.00
Motilal Oswal Financial Services Ltd	3,67,148.00	83,515.00	1,03,853.00
Axis Securities Ltd	3,63,200.00	81,470.00	1,07,950.00
Nuvama Wealth Management Ltd	3,58,163.00	76,596.00	1,11,084.00
Anand Rathi Share and Stock Brokers Ltd	3,50,384.00	73,314.00
JM Financial Institutional Securities Pvt Ltd	3,51,335.00	65,766.00	1,19,356.00
Average	3,57,829.75	85,157.25	1,16,283.50

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Saji George Titus

 

 

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