CIL: Sustainability of strong September numbers crucial

Low e-auction prices and ongoing coal block auctions weigh on sentiment

The 31-per cent growth in despatches for September should have given Coal India’s (CIL’S) investors a reason enough to cheer. But it has failed to lift sentiment for the stock, which has been on a downtrend for the past one year and had hit a 52week low on September 30. Although it gained more than 1 per cent on Monday, it was down 1.4 per cent on Tuesday. So, what is worrying the Street?

The strong growth in September despatches brings some relief to CIL, which has seen continuous pressure on sales during the current year impacted by the Covid-19 pandemic. However, even after strong September numbers, the cumulative sales volume for the first six months of 2020-21 (FY21) is down 7.6 per cent year-on-year (YOY). Moreover, the surge in September comes on the low base of last year. September 2019 sales had seen the impact of high rainfall as well as law and order issues.

Moreover, the coal-based power generation is trending higher. This has pushed up CIL’S coal offtake to thermal plants by 5 per cent month-on-month in September, according to analysts’ data. Since this is on a low base, all eyes will be on volume trajectory in the coming months.

The volume growth has been a key concern of the Street. While despatches during the first six months of FY21 have been weak, despatches in 2019-20, too, had declined 4.3 per cent over the previous year. Not only has CIL’S sales volume performance disappointed, there are increasing concerns on rising competition from private players.

On the one hand, coal block auctions can lead to competition setting in for CIL. On the other, it also means many of its customers vying coal blocks in these auctions may over a period of time have their own supplies from captive mines. After a few years (that may be required for mine development and ramping up production by private players), CIL’S monopoly in the domestic arena may end.

Additional concerns prevail on rising renewable power capacities and simultaneously, fewer new thermal plants. This can impact CIL’S future volume outlook.

While the company is addressing concerns and targeting import substitution, the benefits are yet to accrue. Therefore, the Street will be watchful on the success of such initiatives. Analysts say gains can accrue if CIL is able to capture even half the quantity of coal being imported into India.

Meanwhile, there is pressure on realisations too, especially of coal e-auction. International coal prices are down significantly and this, in turn, puts pressure on more profitable e-auction volumes, which fetch market-determined prices.

The e-auction premiums (over and above the notified price) have regularly declined. Analysts say even though the company sells most of its produce under the fuel supply agreement, where the supply price does not change much, e-auctions contribute to a third of CIL’S profitability. The e-auction realisations during the June quarter had plunged 24 per cent YOY to ~2,105 per tonne, and analysts anticipate more pressure in the September quarter.

Due to weak volumes and realisations, pressure on profit, too, has increased and is keeping investors anxious with regard to dividend yield.

“If profits decline, how will CIL be able to maintain good dividend yield?” asks Rupesh Sankhe at Elara Capital. Sankhe says with multiple concerns on volume growth and rising competition, the stock is not able to command the price -to - earnings multiples as witnessed earlier.

Though Sankhe, like most analysts, is positive on the stock looking at cheap valuations and expectations of demand improvement, the sentiment can improve only if CIL’S volumes start growing , which, in turn, can help drive e-auction premiums and its profit. Till then, not much upside may be seen in the stock, as investors will be exploring other investment options in the market, says an analyst at a domestic brokerage.

While despatches during the first six months of FY21 have been weak, despatches in 2019-20, too, had declined 4.3 per cent over the previous year