Q3FY24 Review: Coal India: E-auction premiums under pressure

20 Feb 2024 , 12:25 PM

Coal India management lowered near term production growth target to 772mt/838mt for FY24/FY25 (vs 850mt) led by rising inventory levels. FY26 production aspiration of 1bn tonne would be supported by focus on project development, clearances and land acquisition. Healthy production is driving higher allocation to e-auction which is hurting premiums (down to 33% in Feb-24). This would continue unless analysts of IIFL Capital Services see higher global coal prices. Overall analysts of IIFL Capital Services, raise Ebitda estimate by ~10%. Retain BUY. 

Lowers near term production guidance on rising inventories: 

Coal India mgmt indicated FY24 production at ~773mt (7mt lower than target) led by EC expiring for a couple of mines at SECL. FY25 production target is now 838mt (8.4% growth YoY) vs earlier target of 850mt given that inventory levels with Coal India has already risen to 60mt (up 51% YoY) as of end Jan-24. End FY24 expected inventory of ~85mt would easily meet strength in demand growth for FY25. 

Rising supply impacting e-auction premiums: 

Improving supplies on healthy production combined with benign global coal prices is driving down e-auction premiums with reported premium for Jan-24 at 54% vs weighted average of 84% in Q2-Q3. Feb-24 has seen further fall to 33% as per management. Coal India has flexibility to raise allocation to e-auction to upto 20% of total volumes vs 9% seen in M9FY24 and as this plays out analysts of IIFL Capital Services expect e-auction premiums to remain under pressure. Key upside risk is rise in global coal prices led by higher Chinese imports or adverse weather hurting global production. 

Retains medium term production target of 1bn tonne: 

Management re-iterated FY26 production target of 1bn tonne to meet the expected rise in demand. This would be aided by continued focus on new project development. During M9FY24 (i) incremental EC capacity stood at 9.85mt vs 87.3mt in FY23 (ii) incremental FC (stage II) came in for 695 Ha vs 886 Ha in FY23 and (iii) land possession stood at 1430 Ha vs 2090 Ha in FY23. Progress on rail evacuation projects as well as first mile connectivity projects remains on track.