Coal India, India’s state-owned coal mining company, saw a decline in e-auction premiums in January and February 2024 according to updates provided by the company’s management. However, analysts believe higher production volumes could help offset the impact of lower premiums.
In an earnings call after the December quarter results, Coal India management informed analysts that e-auction premiums had dropped to around 48-50% in January 2024 from average premiums of around 80% expected for the full 2024 financial year. Premiums had further reduced to around 38% in February 2024.
E-auction premium refers to the additional amount coal buyers agree to pay over the notified price for coal bought through e-auctions. This premium provides additional revenue to Coal India. The decline in recent months is a cause for concern.
However, the management also shared that production volumes have increased. Volumes grew 17% in January 2024 and stood at 13% higher than sales during the month. For the full 2024-25 financial year, Coal India has slightly trimmed its production guidance to 770 million tonnes from earlier estimates but the volume is still expected to be significantly higher than previous years.
Analysts believe the increase in production volumes can help offset some of the impact of lower e-auction premiums. Higher supplies through increased output would mean Coal India is able to sell more coal even at lower premium rates. This could balance out the drop in additional revenue from premiums.
The management has also guided that e-auction premiums for the full 2024 financial year are still estimated to be around 80% on average. There is an expectation that premium rates may recover from the recent lows seen in January and February as coal demand is expected to remain robust.
Several brokerages maintain a positive outlook on Coal India despite the recent dip in premiums. CITI has a neutral rating with a target price of Rs 430 but says volume growth should offset the premium decline. CLSA has an ‘outperform’ rating and raised its target to Rs 480, pointing out that import substitution could maintain domestic coal balance even as output outpaces demand. Motilal Oswal also retains a ‘buy’ rating with a target of Rs 461, citing strong production estimates given India’s rising thermal power generation needs.
In summary, while Coal India’s e-auction premiums have fallen in recent months, the consequent impact may be cushioned by increased production volumes as guided by the company. Most analysts also expect premium rates to recover and see the current weakness as temporary rather than structural. Coal India is thus likely to remain well positioned to benefit from India’s growing energy demand.
