After reaching all-time lows last month, the share of Coal India (CIL) recovered by around 10%. While some of these gains were motivated by stock valuations hitting the trough, some relief for CIL was also anticipated with the resumption of business and industrial activity , leading to some increase in demand for coal from thermal power generators and other end-user industries.
However, the benefits are likely to be limited and the ongoing challenges are likely to limit significant upside. This is also the reason why the 10 per cent increase in CIL's share price since March's low is lower than the 23 per cent increase in Sensex during that period.
Coronavirus disease (Covid-19)-induced shutdown started at a time when power demand was already low — it was just 1.5 per cent higher in the first 11 months of 2019-20 (FY20). Furthermore, despite the 'mustrun' status of renewable energy, coal-fired power plants were responsible for the brunt of the decline in demand. Analysts say that generation of thermal plants fell by 40% year-on-year (YoY) between March 25 and March 30.
Worse, although the majority of CIL supplies are directed to the power sector, other energy-intensive industries, such as metals (steel and aluminium) and cement, are also facing demand woes.
In fact, the demand-supply mismatch has already led to an increase in CIL 's inventory of 74 million tons ( mt) at the end of March.
Against this history, and with thermal power plants having an inventory of 43 mt (28 days of consumption), the path forward is daunting.
Merchant power producers, too, feel the pressure of reduced industrial activity and, in turn, demand, as well as unit power realizations. All this is not good for the e-auction volumes and realizations of CIL, which are market based and already impacted by falling international coal prices.
Analysts expect an average of Rs 2,000 per ton of e-auction in 2020-21 (FY21) compared to Rs 2,200 in FY20 and Rs 2,632 in 2018-19.
For the March quarter (Q4FY20), Emkay Global expects CIL's net sales to fall by 3.3 per cent, and EBITDA's net earnings to fall by 34% and EBITDA's net profit by 34%.
The sharper fall in profits is due to the fact that costs may not fall proportionately. Beyond Q4, management guidance for FY21 on-inventories, balloon receivables, production and capital expenditure will be closely monitored.
For the time being, given the demand issues, Motilal Oswal Securities has reduced its adjusted Ebitda estimate of FY21 by 24 per cent.
Among the few positive ones, CIL's strong balance sheet, high dividend yields of up to 8 per cent, and cheap valuations of about 2x its estimated business value of 2021-22 / Ebitda (historical average is 7x).
