The company fared well on production in August despite it being a seasonally weak month because of rains. Output rose 8.5% year-on-year (y-o-y) to 46.2 million tonnes, but the rise in offtake or sales volumes was subdued at 5% y-o-y because of the higher base of last year. Supplies to thermal power plants stood at 86% of the total and increased by 16% y-o-y. For FY23, CIL’s offtake target is 700 million tonnes, implying 3.6% y-o-y growth for the rest of this fiscal.
The demand momentum in the power sector is expected to continue, driving a rise in offtake in the coming days. E-auction realizations are also robust. CIL supplies coal through the fuel supply agreements (FSA) and the e-auction route. Coal sold through e-auction tracks prices of international coal, which have surged substantially in 2022 so far.
Europe has banned coal imports from Russia, a key exporter of this commodity, against the backdrop of the ongoing Russia-Ukraine war. This would mean an increase in coal supply from Australia and South Africa. Also, elevated natural gas prices offer no respite and would boost coal demand in Europe in winter. As such, Europe has restarted its coal-fired power plants. “We further believe Europe will continue to reopen as well as increase the life of its remaining thermal power plants to shift away from Russian gas and in the process will fuel demand for thermal coal," said analysts at Motilal Oswal Financial Services.
These factors are likely to keep international coal prices firm, which would mean higher imported coal prices, thus, improving outlook for CIL’s e-auction realisation. Domestic demand, especially in the power sector, is also strong. The coal inventory at non-pit head plants is 25% of normal levels, according to analysts at Antique Stock Broking.
The demand in the non-power segment is also staging a recovery. “Taking cues from the August supply to the unregulated sector, we believe that e-auction volume is expected to sustain at 20-25 million tonnes with realization expected to increase significantly compared to June quarter (Q1FY23) levels," said a report by Edelweiss Securities dated 1 September.
In Q1FY23, CIL’s e-auction realization was ₹4,340 per tonne, a 200% premium over coal sold through FSA. CIL may reap a record ₹48,000 crore annual earnings before interest, tax, depreciation and amortization (Ebitda) versus ₹24,685 crore in FY22 if the e-auction window remains elevated at the Q1FY23 level, according to Antique.
However, there are downside risks to this estimate. A potential drop in power demand is one risk, and another would be a drop in e-auction premium. As such, CIL’s investors are also awaiting a raise in FSA prices, which were last revised in 2018. The impending wage hikes warrant an increase in FSA prices so that earnings are not impacted. CIL raises wages every fifth year, and a revision has been due since July 2021. The company is in talks with the employees’ union for wage hikes.
Meanwhile, shares of CIL are flirting with their 52-week highs of ₹236.80 each. While environmental, social, and governance issues persist in the long run for the CIL stock, the prospects are bright from a near-to-medium term perspective, which reflects in the stock movement.
Even so, investors would do well to track hikes in FSA prices. Any adverse developments on wage renegotiation would dampen investor sentiments.
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