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<\/p>\nConflicting views on Coal India (CIL) might leave investors confused.<\/p>\n
<\/p>\n
The bullish perspective that India has strong power demand (and also high steel production) means high demand for coal.<\/p>\n
As CIL is the monopoly producer of coal — supplying over 80 per cent of the domestic requirement – the public sector undertaking should be a beneficiary of the rising power demand.<\/p>\n
As a result, steel producers who don’t have access to CIL’s coal or their own captive mines, are forced to import coal.<\/p>\n
The bear case is as follows.<\/p>\n
A large part of CIL’s production must be sold at fixed long-term rates under its FSA (Fuel Supply agreements) with power plants.<\/p>\n
The FSA rates are rarely revised, and are unlikely to go up in an election year since an FSA hike translates directly into higher power tariffs.<\/p>\n
The last such revision took place in 2018.<\/p>\n
CIL manages to sell between 8-15 per cent of production at e-auctions, at higher realisations.<\/p>\n
In addition, CIL has high capex spends but according to the bears, it has not managed to generate commensurately higher volumes of production.<\/p>\n
In addition, CIL is due for a wage hike.<\/p>\n
There’s robust demand for coal — both bulls and bears agree on that.<\/p>\n
CIL hopes to ramp up production to 1 billion tonnes per year (from an estimated 700 million tonnes per annum or MTPA in the 2022-23 financial year (FY23), and envisages improved e-auction volumes and premiums.<\/p>\n
While e-auction prices are linked to imported prices (hence global prices), and global prices have eased, higher e-auction volumes would compensate.<\/p>\n
After protracted negotiations, wage hikes are expected to be lower than provisioned and the PSU may use wages as a lever to raise FSA prices.<\/p>\n
The company has reduced hiring among older age groups, and as retirements occur, the wage bill should reduce.<\/p>\n
However, it is possible that further negotiations will result in higher wage bills and also higher pensions.<\/p>\n
The premium of e-auction prices over the FSA is 200 per cent, or higher.<\/p>\n
This does indicate FSA prices are too low.<\/p>\n
Analysts believe that quarter 4 e-auctions will cover around 10 per cent of production and that the premiums and volumes will be good.<\/p>\n
Is this sustainable – especially the e-auction volumes – in the long run?<\/p>\n
As importantly, can CIL (a PSU with its largest customer NTPC, also a PSU with locked-in FSA) hike FSA prices even if it has to commit to higher FSA volumes?<\/p>\n
CIL has FSA commitments for up to 600 MTPA in the long term and it will despatch around 696 MT (estimated) in FY23.<\/p>\n
The capex must translate into pushing production volumes towards the 1 billion target.<\/p>\n
Analysts project CIL will despatch 765 MTPA by FY25.<\/p>\n
Returning to the bear case, productivity in terms of coal produced per employee is very low.<\/p>\n
The capex aims to improve productivity and reducing the workforce could help.<\/p>\n
The company had Rs 44,500 crore in cash on its balance sheet (Sep 22) which is 30 per cent of its market capitalisation.<\/p>\n
Hence, you can argue CIL is under-valued.<\/p>\n
But the PSU also has persistently high receivables and large long-term provisions.<\/p>\n
Is it under-valued or a value trap?<\/p>\n
The bears calculate fair value at around Rs 198 while the bulls estimate it to be between Rs 259 and Rs 275.<\/p>\n
At the current price of Rs 208, the possible upside seems higher than the possible downside.<\/p>\n