Coal India Maintains Earnings Momentum: Operating Leverage Gains Amid Lower E-Auction Premiums 2023
Coal India Maintains Earnings Momentum: Operating Leverage Gains Amid Lower E-Auction Premiums 2023
For the sixth consecutive month in FY24, production and sales volumes have maintained their highest-ever levels. The flat volumes from MCL have been countered by the resurgence of activity at SECL. Thanks to enhanced rake availability, the normal volume decline in Q2 is noticeably reduced in FY24.
The volume to the unregulated sector (NRS) increased by 61% year over year in August, which is anticipated to support FSA pricing. Due to a production ramp-up, the pithead inventory currently stands at 45.3 million metric tonnes.
With greater sales volumes, supplying both NRS and e-auction clients, we predict that CIL will gain operating leverage in the future. This is still the case even if a smaller e-auction premium is anticipated than in FY23.
We remain optimistic about meeting our FY24E sales volume target of 741 million tonnes, which would represent a 6.5% year-over-year growth. The excellent 7.5% year-over-year improvement in offtake observed by CIL so far through August 2023 lends credence to this belief.
We point to increasing e-auction bookings and improved rake availability as two particularly encouraging trends. The main points include:
(i) After two months of decrease, rake availability increased by 4% year over year in July 2023. We predict that this upward trend will continue through August 2023.
(ii) According to our channel checks, e-auctions in July 2023 were claimed to have booked 5.01 million tonnes (mt), with 6.156 mt being offered.
When compared to the 2.66 mt booked at the same time last year, this is a sizable increase. E-auction premiums above notified prices, however, were down from the 290% observed a year earlier to 58%. We estimate that following e-auction reservations will be carried out at higher rates because of the 20–25 percent increase in the price of coal on the global market in July 2023. These developments are encouraging for the sector because they point to the availability of rakes and the possibility that e-auction pricing would catch up with rising coal prices internationally.
The year-to-date performance through August 2023 shows a positive improvement in volumes for both regulated and NRS clients, which is important because CIL’s earnings are sensitive to volumes. As a result of this move, the firm may benefit from both enhanced operational leverage and higher FSA pricing. Additionally, the recent increase in global coal prices creates a beneficial environment for future e-auction pricing. Also encouraging for continuing profits momentum is the increase in volume at SECL.
Coal India Limited, the largest coal producer in the world, continues to showcase its resilience and adaptability in the face of changing market dynamics. Despite challenges posed by lower e-auction premiums, the company has managed to maintain its earnings momentum, thanks in part to the benefits of operating leverage. In this article, we’ll delve into the key factors contributing to Coal India’s sustained success and how it navigates a volatile coal market.
Coal India Limited (CIL) was established in 1975 as a state-owned coal mining company in India. Over the years, it has grown to become the world’s largest coal producer, contributing significantly to India’s energy security. CIL operates under the Ministry of Coal, Government of India, and is responsible for mining, processing, and selling coal across various sectors, including power, steel, cement, and more.
The coal industry is no stranger to volatility. Fluctuating demand, regulatory changes, and environmental concerns have all impacted the sector. In recent years, the global shift towards cleaner energy sources and India’s push for renewables have put additional pressure on the coal market. Amid these challenges, CIL has demonstrated its ability to adapt and thrive.
One of the critical revenue streams for Coal India is through e-auctions. E-auctions allow the company to sell coal to various consumers, including power plants, cement manufacturers, and other industrial sectors, at prices determined through a competitive bidding process. Premiums are an integral part of these auctions, representing the amount buyers are willing to pay over and above the notified price.
In recent years, CIL has faced the challenge of declining e-auction premiums. This trend is attributed to several factors, including subdued demand from certain sectors, availability of alternative energy sources, and stricter environmental regulations. Lower premiums mean that CIL’s revenue from e-auctions is reduced, impacting its overall earnings.
To mitigate the impact of lower e-auction premiums on its earnings, CIL has effectively utilized the concept of operating leverage. Operating leverage refers to the ability of a company to increase its profitability through cost management and operational efficiency improvements.
- Cost Rationalization: CIL has focused on optimizing its operational costs. This includes rationalizing manpower, streamlining logistics, and adopting modern mining techniques to extract coal more efficiently. These efforts have led to cost savings, helping offset the revenue decline from lower premiums.
- Increased Production: Another strategy employed by CIL is to increase coal production. By producing more coal, the company can leverage its existing infrastructure and resources more effectively, spreading fixed costs over a larger production base. This not only boosts earnings but also ensures a consistent supply of coal to meet market demand.
- Diversification of Revenue Streams: Recognizing the need to reduce reliance on e-auction premiums, CIL has been actively diversifying its revenue streams. This includes long-term fuel supply agreements with power producers, coal washing and beneficiation, and exploring opportunities in non-coal mining sectors.
- Technological Advancements: Embracing technology has been a game-changer for CIL. Automation, data analytics, and remote monitoring have improved operational efficiency, reduced downtime, and enhanced safety standards, further contributing to cost savings and increased productivity.
Coal India Limited’s ability to maintain earnings momentum amid lower e-auction premiums underscores its resilience and adaptability. While the coal industry faces challenges in the form of changing market dynamics and environmental concerns, CIL’s commitment to operational excellence, cost optimization, and diversification of revenue streams positions it well for the future. Moreover, as India continues to rely on coal as a primary energy source, CIL’s role in ensuring a consistent supply of coal remains crucial.
Coal India’s performance in the face of evolving market conditions showcases its ability to navigate challenges and capitalize on opportunities. By leveraging operating leverage and embracing technology and diversification, CIL is not only sustaining its earnings but also ensuring its continued relevance in India’s energy landscape.
