Grade reset to dent Coal India's FSA realisation: Jefferies

The recent grade downgrades at Coal India's mines could hit its realisation from fuel supply agreement (FSA) by 3-5 per cent and estimated earnings for the current financial year by 11-16 per cent, according to a note released on Wednesday by research analyst firm Jefferies India.

"We believe recent grade downgrades at CIL's (Coal India Ltd) mines could hit FSA realisation by 3-5 per cent and FY18 (2017-18) estimated earnings by 11-16 per cent," the note said.

According to the note, part of the impact has already been reflected in earnings of 2016-17.

The fuel quality watchdog Coal Controller's Organisation downgraded 40.76 per cent of 871 sidings at 386 mines of Coal India and in most cases, downgrading has been of one to two grades, the miner said.

 

"Our review of mine wise grade changes at key subsidiaries- South Eastern Coalfields Ltd (SECL), Mahanadi Coalfields Ltd (MCL), Eastern Coalfields Ltd (ECL) and Bharat Coking Coal Ltd (BCCL) - suggest grade reset at these subsidiaries could hit CIL's FSA realisation by 3.2 per cent.

"We think impact due to grade changes at SECL which contributes 25 per cent of the miner's output could be meaningful. Extrapolating this to other subsidiaries Central Coalfields (CCL), Western Coalfields (WCL), potential impact on CIL's FSA realisation could be around 4.8 per cent," the research firm's note said.

The miner had said under revised methodology, sampling and analysis of different seams or loading points was carried out through academic institutions and based on their results, the organisation finalised the grade.

In respect of CIL (Coal India Ltd), these institutions drew samples in respect of sidings of 386 mines. Consequently, 51.55 per cent retained their earlier grade while 7.69 per cent were upgraded in reference to the grade declaration during 2016-17, the miner said.

Coal India, however, said the grade reset impact on revenue could only be assessed after coal sampling and analysis over a reasonable period of time.

According to Bhaskar Basu, Equity Analyst at the research firm, another price hike to offset the grade impact at near term is not expected, but possibility cannot be ruled out.

The research firm said the new grades would be effective April 1, 2017, but the impact may have been partly reflected in CIL's FSA realisations in nine months of 2016-17.

"Coal sales to key power utilities like NTPC are based on third party sampling, wherein final sale price is based on realised grade rather than declared grade. Despite 6.4 per cent hike in FSA prices in May 2016, CIL's FSA realisation in FY17 (2016-17) has remained flat year-on-year due to grade slippages," the note said.

According to research analyst firm, coal off-take is estimated to grow 7 per cent year-o-year to 581 million tonnes in 2017-18.