CIL's volumes recover; investors should keep an eye on e-auction premiums

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Coal India’s eight per cent year-on-year growth in dispatches in March 2019, led by support from key subsidiaries, is an improvement over the earlier declining volume trend. The higher dispatches from its larger subsidiaries are positive and indicate that bottlenecks around dispatches may be getting addressed. Meanwhile, the growth of five per cent year-on-year in dispatches to 608 million tonnes (MT) for FY19 also came ahead of analysts’ estimates, which were reduced post-Coal India reporting a decline of 2.4 per cent year-on-year in January.

As the latest volume figures may ease some investor concerns, an analyst at Motilal Oswal Securities says that Coal India has not only recouped on the slow run-rate of earlier months but also set a strong base for dispatch growth over the coming months. The company added 19.5 MT to inventory in March 2019, taking the closing inventory to 55 MT which is positive.

The key drivers of improved dispatches have been improved rake availability (railways) along with good progress on coal evacuation infrastructure. As per analysts’ calculations, rake availability improved seven per cent in March 2019, to 314 rakes a day, allowing Coal India to dispatch a higher amount of coal from its mines. The key to future growth is the sustainability of rake availability apart from the ramp-up of its own railway lines, they add.

While rising production and dispatches are positives, domestic demand also remains robust. However, with declining international coal prices, imports are also rising. Higher inventory at Coal India and rising imports, both don’t bode well for the company’s more profitable e-auction sales (about a fourth of total volumes), which are at market-determined prices. Coal India sells about 75 per cent of its volumes at notified (pre-determined) prices, which are lower than market rates. E-auction premium indicates the premium over notified price.

As per Kotak Institutional Equities, e-auction premiums have declined to 84 per cent in February from 104 per cent in January 2019. Though premiums are still well above FY18 levels, they are showing a downward trajectory with a decline in imported coal prices, say analysts. Edelweiss Securities also attributes the decline in premium to higher domestic coal inventory. Worries over e-auction price decline have been a key reason for Coal India stock’s underperformance, apart from volume concerns which however are getting addressed now.

Overall, while stock valuations remain attractive and coupled with strong dividend yield provide downside cushion, the Street will be a keeping an eye on the trend in e-auction premiums.

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