Weaker power demand affecting earnings prospects of Coal India Ltd.

Coal India Ltd’s production and sales numbers during February continued to disappoint, declining by 6.6% and 6.2% respectively. Though production at SECL, the company’s largest coalfield, increased, the disappointment was led by a decline in production at most other coal fields. Volume growth continues to remain a concern.

Analysts attribute Coal India’s sluggish February operating performance to weak demand from the power sector. Improved thermal power demand in the country remains crucial for the growth of Coal India’s sales volumes. Analysts expect improvement in economic activities to push power demand, and rising inventory at power plants to drive growth in Coal India sales.

Additionally, thermal power is also facing competition from rising renewable power capacities. Also, competition from private merchant miners over the longer term has been adding to the concerns. Coal India, therefore, has been eyeing import substitution to drive volumes. 

Meanwhile, improvement in more profitable e-auction premiums has come as a boon to India’s largest state-owned coal miner. Weak demand had meant pressure on e-auction premiums and realizations. E-auction realizations during the December quarter fell 44 per cent year-on-year to Rs 1,466 per tonne. Hence a rebound in premium realizations remains eagerly awaited.

Coal India recently approved a venture into aluminium value chain (mining-refining-smelting) and solar power value chain (ingot-wafer-cell-module and generation). Though its solar power venture is being looked at in positive light, analysts are not greatly encouraged by proposed investment into smelter business looking at the low return ratios the business generates. Coal India’s volume trajectory has wavered since last November mainly due to a high base and lacklustre demand from the power sector, say analysts at Edelweiss Securities Ltd. They add that e-auction premium crashed to a single digit as the company reduced the floor for bidding. However, analysts now expect an improvement in both volumes to the power sector and e-auction premiums.

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