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E-auction sale stoppage is transitory

News

Amid ongoing temporary deficit of coal in India, Coal India has been advised to prioritize coal supply to the power sector and not conduct any further e-auction of coal to the nonpower sectors till the situation normalizes. It can conduct special forward e-auction for the power sector.

Details

 At FY21-end, Coal India had ~100mt (78mt at March 2020-end) of coal inventory as power producers refrained from taking adequate coal, keeping their inventory at low levels in anticipation of lower power demand amid increasing Covid cases. This led Coal India to produce less in Q1FY22 (up 2.5% YoY on a low base), liquidating its inventories. With rising demand, Coal India started producing more from July, but was hit by heavy rains in September, which affected production and offtake. Moreover, power demand increased with easing of Covid cases and coal imports also reduced (global prices increased 3x in a year by September2021), which led to coal shortage in India.

 Coal India allocated ~70% of e-auction coal to non-power sectors during H1FY22 – of the ~57mt of e-auction coal allocated, ~40mt was for non-power.

 E-auction coal volume was on a decline and the company allocated only ~4mt in September against ~17mt in August. This led to sharp increase in e-auction coal prices, as premium over notified price increased to 150% in September v/s ~45% in August. In H1FY22, premium over notified prices was ~40%, that is, e-auction allocated price was ~Rs1,780/t.

 The stopping of e-auction volume to non-power sectors is a temporary issue and may not last beyond November, as Coal India is ramping up production (average dispatch of ~1.69t/day in October v/s 1.61t/day in September) and demand for coal for household power may reduce post Diwali. We have factored in 100mt e-auction volume in FY22 (94mt in FY21) at an average price of Rs1,860/t, which is not at risk.

 Even assuming that Coal India may end up not selling any further coal under eauction to non-power in H2FY22, it will end up with ~70mt in FY22. This will negatively affect our FY22 EBITDA by ~5% only.

Our view:

fundamentals remain intact, reiterate BUY We see the stoppage of e-auction volume to non-power sector as temporary and do not see any risk to our estimates. FSA price hike (assumed 10% hike) is round the corner. Volume growth is there in H2FY22 (expect ~9% growth v/s H1FY22), with end of monsoon. Receivable days have been declining (down ~Rs60bn in H1FY22). The stock trades at ~11% dividend yield and 2.6x FY23E EV/EBITDA. Reiterate BUY with a TP of Rs252, based on 4x FY23E EV/EBITDA.

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