Covid-19 impact: Demand, pricing pressures to weigh on Coal India

Costs unlikely to fall; does not bode well for earnings

After hitting all-time lows last month, shares of Coal India (CIL) have recovered by about 10 per cent. While a part of these gains were led by stock valuations hitting a trough, some relief for CIL was also expected with the resumption of business and industrial activity, leading to some uptick in coal demand from thermal power generators and other end-user industries.

However, the benefits are likely to be limited, and the persisting challenges will likely limit significant upside. This is also a reason why the 10 per cent gain in CIL’s share price since March lows is lower than the 23 per cent rise in Sensex during this period.

The coronavirus disease (Covid-19)-induced lockdown started at a time when power demand was already soft — it was up just 1.5 per cent during the first 11 months of 2019-20 (FY20). Further, given the ‘must-run’ status for renewable power, the brunt of demand decline was being borne by coal-based plants. Analysts say generation from thermal plants fell 40 per cent year-on-year (YoY) between March 25 and March 30.

Worse, while a majority of supplies of CIL is directed at the power sector, other energy-intensive industries, such as metals (steel and aluminium) and cement, too are facing demand woes.

In fact, the demand-supply mismatch has already led to CIL’s inventory swelling to its highest-ever level of 74 million tonnes (mt) at the end of March.

Against this backdrop, and with thermal power plants having 43 mt inventory (28 days of consumption), the forward journey is challenging.

 

 

Merchant power producers, too, are feeling the pressure of reduced industrial activity and, in turn, demand as well as per unit power realisations. All this is not good for CIL’s e-auction volumes and realisations, which are market driven and already impacted by falling international coal prices.

Analysts estimate per tonne e-auction realisations to average at Rs 2,000 in 2020-21 (FY21), compared to about Rs 2,200 in FY20 and Rs 2,632 in 2018-19.

For the March quarter (Q4FY20), Emkay Global expects CIL’s net sales to fall by 3.3 per cent YoY, and earnings before interest, tax, depreciation, and amortisation (Ebitda) and net profit by 34 per cent each. The sharper fall in profits is because costs may not fall proportionately. Beyond Q4, management guidance for FY21 on rising inventories, ballooning receivables, production, and capital expenditure will be closely watched.

For now, given the demand issues, Motilal Oswal Securities has cut its FY21 adjusted Ebitda estimate by 24 per cent.

Among few positives include CIL’s strong balance sheet, high dividend yield of up to 8 per cent, and cheap valuations of about 2x its 2021-22 estimated enterprise value/Ebitda (historical average is 7x).