Coal India devises strategy to stave off impact due to mine grade revision

There is a consequence of revenue loss arising out of grade revision of its 177 mines

Coal India may consider revising coal prices this year in case sales volume doesn’t pick up to compensate for the revenue loss arising out of grade revision of its 177 mines.

A senior company official said while the company had suffered poor sales in the last financial year as sales volume grew only 1.6 per cent cent at 543.16 million tonne (mt), against the targeted 8.8 per, on account of lower-than-estimated power demand, the situation is gradually improving and Coal India is likely to meet its offtake target in the coming months.

“We expect sales volume to pick up in the coming months which will make up for the revenue revision arising out of grade adjustment of the mines. In case volume doesn’t pick up, we may consider revising coal prices to make up for revenue”, the official told Business Standard.

However, the current demand condition, according to the official, will not call for an immediate hike in coal prices.

Recently, the Coal Controller Organisation had inspected 871 samples from 386 Coal India mines, following which 40.76 per cent of the samples were downgraded while 51.55 per cent retained their earlier grade. Around eight per cent of the sample was upgraded. The entire process finally culminated in downgrade of 177 mines.

Although the company is yet to conclude the monetary impact of the mine grade process, Coal India executives and analysts feel it will be in the range of Rs 1,500-2,500 crore for the ongoing fiscal year.

According to an analyst from brokerage firm Motilal Oswal, Mahanadi Coalfields Ltd – Coal India’s largest subsidiary — will take at least Rs 400-crore top line hit while there will be a Rs 1,000 crore to 1,100-crore impact on the top line of South Eastern Coalfields Ltd, Coal India’s second-largest subsidiary.

“Nevertheless, it is expected that volume sales will pick up, which will help Coal India maintain its top line”, an analyst with Motilal Oswal said.

In April this year, the company’s offtake volume jumped 6.1 per cent to 45.29 million tonne (mt), compared to a 2 per cent decline in the same month of 2016. 

Amit A. Dixit, a research analyst with Edelweiss Research, expects Coal India to sustain this volume spurt.

“The company has reported 6 per cent-plus year-on-year growth for the fifth month since November 2016 led by 14 per cent YoY and 11 per cent YoY jump at major subsidiaries—South Eastern Coalfields and Northern Coalfields, respectively. We anticipate further spurt in despatches as land acquisition issues at Mahanadi Coalfields are sorted out”, Dixit said. According to the Coal India official, the demand for power is expected to go up in the ongoing financial year which will call for higher coal offtake from power plants and boost sales in turn.

Although market analysts have reduced the estimated coal demand in the country by 52 mt at 918 mt for financial year 2019-20, they are of the view that coal demand will still increase at a CAGR of 5.4 per cent over the next three fiscal years.

“Driven by destocking and substitution of coal and pet coke imports, Coal India’s dispatches will increase by 6.8 per cent to 580 mt in fiscal year 2017-2018 and by 6.6 per cent to 618 mt in the 2018-19 fiscal year”, the analyst with Motilal Oswal said. 

Coal India officials also predict a higher revenue realisation from auction sales in the current fiscal year which is expected to compensate for the topline loss due to mine grade revision.

“E-auction coal prices are in the process of inching up due to higher international coal prices. However, under all circumstances, if volume doesn’t pick up, then we may revise the coal prices in line with global trends”, the Coal India top executive said.

In January this year, Coal India had upped steel grade coal prices by 20 per cent by which it expects to add Rs 2,986 crore to its top line in the current fiscal year. Besides, in the last fiscal year, the company had targeted to raise an additional Rs 3234 crore by raising the average coal prices by 6.29 per cent.