Power Play and Rising E-Auction Premium Boost Coal India’s Outlook, Despite Second Consecutive Day of 52-Week High Shares
Coal India Ltd (CIL) has made a strong start in 2024, with its shares hitting a new 52-week high for the second consecutive day on Tuesday. The company’s coal production and offtake numbers for April-December, released late Monday, showed a significant 11% year-on-year rise in production to 531.9 million tonnes, and a 9% uptick in offtake to 552 mt. This positive performance propelled CIL’s stock to a fresh 52-week high of ₹395.85 per share.
Analysts speculate that the rally in power stocks may have also contributed to the positive sentiment surrounding CIL. According to Rohit Natarajan, an analyst at Antique Stock Broking, the premium valuation of power stocks compared to CIL may be viewed as a proxy for power, potentially explaining the surge in CIL shares.
Despite the impressive 70% rally in the past six months, some investors may wonder if there are concerns on the horizon for CIL. However, several reassuring factors exist, including the emphasis on thermal power generation, volume growth, and higher e-auction premiums, along with CIL’s attractive dividend yield.
Looking ahead, CIL has set ambitious coal production targets of 780 mt for FY24 and 850 mt for FY25, signaling confidence in future demand prospects. Given the increasing reliance on thermal power plants, the demand for coal as a fuel for generating thermal power is expected to rise, promising strong volume growth in the future.
E-auction premiums have been strong, bolstering blended price realizations and margins. Typically, coal sold through e-auctions commands higher prices, resulting in an e-auction premium above notified prices.
In July, the e-auction premium softened to 58%, aligning with the decline in international coal prices. However, in recent months, Coal India Limited’s (CIL) e-auction premium has fluctuated between 80-100% due to increased global prices and demand resurgence. In the first half of the fiscal year 2024 (H1FY24), the e-auction volume share stood at 9%, and CIL anticipates it to rise to 15% in the second half.
It is crucial to monitor e-auction price trends in the upcoming quarters, along with the overall offtake trajectory. Weak e-auction prices will undoubtedly impact CIL’s EBITDA (earnings before interest, tax, depreciation, and amortization) growth.
An expert analyst noted, “The stock trades at an EV/EBITDA multiple of close to 5 times, a considerable distance from its historical 9-10 times.” EV refers to enterprise value.
Furthermore, investors should remain attentive to potential stake sales in subsidiary Bharat Coking Coal Ltd and its subsequent listing.
