Volume issues to falling global prices, many concerns for Coal India stock

Muted volumes, declining coal prices and e-auction realisations, competition from private miners and stake sale overhang to weaken sentiment

The Coal India Ltd (CIL) stock, underperforming leading indices, is down by over 24 per cent since its June highs. Concerns over volume growth, declining international coal prices, lower e-auction realisations and coal block auctions for merchant mining (private sector) have hit investor sentiment and are responsible for the stock’s weak performance.

Even a strong boost from the recent reduction in corporation tax rate has failed to provide an impetus to the stock, as the company’s revised profit estimates still do not show significant earnings growth for the FY19-21 period. The Street also fears that in order to compensate for lower corporation tax revenues, the government might speed up stake sale in various public-sector entities like CIL. However, even if the stake sale does not come up, there are enough worries on the fundamental side that could weigh on the stock.

The volume woes for Coal India have continued throughout the financial year. Sales volumes in the first seven months have fallen by about seven per cent year-on-year, which analysts attribute to recent production issues at the company’s key subsidiaries SECL (South Eastern Coalfields) and MCL (Mahanadi Coalfields). An 11 per cent year-on-year volume decline during the September quarter led to revenues falling 7 per cent when compared with the year-ago period.

While analysts expect volumes to catch up moving forward, with monsoon flooding now behind, most are cutting their volume estimates for FY20. Analysts at Motilal Oswal, while expecting a recovery in volume growth for the remaining five months of FY20, are expecting a flattish volume of 610 million tonnes (mt) for FY20. Even ICICI Securities, which has cut its FY20 estimate to 600 mt, has lowered its FY21 volume estimate to 625 mt from 650 mt earlier. Given that CIL had seen a volume offtake of 609 mt during FY19, its performance in the current financial year is expected to be muted.

These concerns also remain elevated if you look at the country’s weak power demand pulling down overall coal demand, with muted requirements from thermal power plants. This situation adds to the worries, as second half of last year had seen a surge in power sector demand, driving CIL’s volumes and also its e-auction prices.

Though higher sales to non-power sector buyers are more profitable, the international prices, declining currently, are pulling down e-auction prices. During the September quarter, while coal sales to power plants based on fuel supply agreements (FSA) were down 12 per cent year-on-year to 104 mt, e-auction sales rose 30 per cent to 15.5 mt. But, as e-auction realisations, which are market-linked, declined by about 15 per cent annually (down 6 per cent sequentially) to about Rs 2,019 a tonne, it capped benefits from higher volumes.

Meanwhile, the government is also trying to fast-track coal mine auctions for merchant mining. This is adding to the concerns that Coal India might face competition from private miners, even as the start of commercial coal mining may have a limited initial impact, as development and ramp-up of production from new mines take time.

The only solace is that the correction has made stock valuations attractive. A dividend yield of 5 per cent can limit the downside for the stock, says Elara Capital’s Rupesh Sankhe. However, the jury is out on this.