scorecardresearchStock analysis: Will Higher Coal Prices Benefit Coal India?
Coal India: The stock has rallied 11.5 percent just in the last 5 sessions and 60 percent in the last 1 year. 23 analysts polled by MintGenie have a 'buy' call on the stock.
Coal India: The stock has rallied 11.5 percent just in the last 5 sessions and 60 percent in the last 1 year. 23 analysts polled by MintGenie have a 'buy' call on the stock.

Stock analysis: Will Higher Coal Prices Benefit Coal India?

Updated: 25 Apr 2022, 07:35 AM IST
TL;DR.

Analysts believe that the current coal shortage and high prices will favour Coal India in the near future. Coal India accounts for the lion's share of total production, accounting for nearly 83 percent of total output.

Coal India Ltd (CIL) is a "Maharatna" public sector undertaking under the Ministry of Coal, Government of India. CIL is the single largest coal producing company in the world and one of the largest corporate employers. The company operates in 82 mining areas spread over eight provincial states of India.

It has 394 mines (as on 1st April 2017), of which 193 are underground, 177 are opencast, and 24 are mixed mines. Coal India Limited (CIL), an organised state-owned coal mining corporation, came into being following the nationalisation of the coal industry in India.

Product Portfolio

The company produces non-coking coal and coking coal of various grades for diverse applications. Most of the coal produced is from open-cast mines. Coal India's major consumers are the power and steel sectors. Others include cement, fertilizer, brick kilns, and a host of other industries. The company sells substantially all of the raw coal it produces in the Indian market.

India is heavily dependent on coal-based power generation. Coal-based power generation accounts for a capacity of around 210 gigawatts (GW) of the total 396 GW, about 53 percent of the country's total capacity, as of March 2022.

Coal India contributes the bulk, at nearly 83 percent, of the total production.

Opportunity

War: The uncertainty over Russia's invasion of Ukraine has pushed domestic buyers to rush to buy coal. Russia accounts for roughly 20% of global thermal coal exports.

Even though India doesn't import coal from Russia, the surge in its prices globally will have a cascading effect on the price discovery front in those origins where it imports from. As per reports, India ships in high-grade coal from Indonesia, Australia, and South Africa.

According to Bloomberg, some buyers in India have spent 340 percent more than baseline prices in local auctions in March, citing people familiar with the situation. The seller was Coal India Ltd, the largest coal producer in the country and the world.

Coal India typically sells 15% to 20% of the coal it mines through an online auction system in which customers make bids above a predetermined minimum price.

According to some reports, Coal India is also seeking to make the first major price increase since 2018 on long-term contracts, arguing that a hike is necessary to handle spiralling costs.

Less Prices: India's industrial power demand has surged after the second coronavirus pandemic wave. On top of that, a widening price gap between lower domestic prices and record global coal prices has led buyers to shun imports, Reuters reported.

Thermal coal loaded at Australia's Newcastle port, a benchmark for seaborne supply in Asia, hit a new high in March as buyers avoided Russian shipments and sought alternatives to pricey natural gas.

Even with large premiums, locally produced coal is still far less expensive than coal imported from Australia or Indonesia. At the March 11 auctions, Coal India offered coal with a heat value of 6,000 kilocalories per kilogramme for about 11,700 rupees ($153.70) per tonne. That’s less than half the price of a similar variety of coal at Newcastle port (Australia).

India is the second-largest importer, consumer, and producer of coal, and has the world's fourth-largest reserves. 

Rise in Power Demand: India's power demand during April last year reached a high of 182.37 gigawatts (GW), which only increased to 200 GW in July 2021. Experts estimate that when summer approaches in a few weeks and industry activities kick up, power demand will certainly exceed even the July 2021 peak this year.

Temperatures in northern India have been unusually high for the time of year since mid-March, resulting in a rapid rise in electricity demand.

Average daily temperatures rose above 24°C in New Delhi as early as March 13, and power demand has surged since then.

Data shows that for Q4 FY22, the daily peak power demand has already averaged at187 GW. From April 1-12, the average daily peak demand stood at more than 194 GW. The peak power demand in April 2020 was 132.73 GW and it was 176.81 GW in April 2019.

Japanese financial services firm Nomura highlighted that the coal inventories held by the Indian power plants remain tight at nine days’ worth of stock as of mid-April and it could result in power outages.

Nomura said nearly 100 out of 173 power plants have critical coal stocks, representing less than 25% of normative levels.

According to federal regulations, power plants must keep at least 24 days of stock on hand.

Analysts believe that the current coal shortage and high prices will favour Coal India in the near future.

Financials

Coal India's revenue from operations rose 20% to 25,991 crore from 21,708 crore in Q3FY21.

For the fiscal quarter ending December 31, 2021, net profit stood at 4,558 crore. It reported a net profit of 3,085 crore in the year-ago period.

Quarterly Financials ( Cr)Q3FY22Q3FY21YoY Growth %Q2FY22QoQ Growth %
Revenue25,99121,70819.721,29322.1
EBITDA6,8255,16532.23,94273.1
EBITDA Margins26.323.8250bps18.5780bps
EBIT5,7844,24936.13,00892.3
PBT6,3024,74232.93,64373.0
Profit after tax4,5583,085 47.72,93755.2
Adj. EPS (Rs.)7.45.047.84.855.2
Source: Geojit Equity Research     

The production of raw coal during the October-December period increased to 163.82 MT, from 156.78 MT in the corresponding quarter of the previous fiscal.

The offtake of raw coal also increased to 173.77 MT during the quarter, from 154.46 MT in the year-ago period.

The company said that sales from e-auction in the October-December period stood at 5,052.97 crore with an average realisation of 1,947.19 per tonne.

Stock Performance

The stock hit a new 52 week high of 209/ share in Friday’s trade. Coal India Stock price has zoomed 27.34% in the last 3 months. The stock has risen 61.66 percent in the last year, compared to a 22 percent rise in the S&P BSE Sensex.

Apart from coal India, shares of power generators in India rose further on expectations that their earnings will be boosted by better returns from merchant and short-term sales since discoms will have to spend more to satisfy rising summer demand.

Stock movement of Coal India
Stock movement of Coal India

So far this month, Adani Power Ltd has gained 109 percent, Adani Green Energy has gained 53.55 percent, Adani Transmission has gained 13.71 percent, Tata Power Co Ltd has gained 9.38 percent, NTPC Ltd has gained 20.78 percent, Power Grid Corp of India has gained 8.03 percent, and JSW Energy Ltd has gained 14.13 percent. BSE Power Index has risen by 28%, Year to date.

Future Plans

Coal India will pump in over 1.22 trillion on projects related to coal evacuation, exploration, and clean coal technologies by 2023-24 to achieve its one billion tonne fuel output target.

An average of 23 analysts polled by MintGenie have a 'buy' call on the stock.

Note: This story is for educational purposes only. Please speak to a financial advisor before investing.

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First Published: 25 Apr 2022, 07:35 AM IST