Coal India devices strategy to stave off impact due to mine grade revision

Coal India may consider revising coal prices this year in case sales volume doesn't pick up to compensate for the revenue loss arising out of grade revision of its 177 mines.

A senior company official said while the company had suffered poor sales in the last fiscal year as sales volume grew only 1.6 per cent cent at 543.16 million tonne (mt) against the targeted 8.8 per cent on account of lower than estimated power demand, the situation is gradually improving now and Coal India is likely to meet its offtake targets in the coming months.

"We expect sales volume to pick up in the coming months which will make up for the revenue revision arising out of grade adjustment of the mines. In case volume doesn't pick up, then we may consider revising the coal prices to make up for revenue", the official told Business Standard.

However, the current demand condition, as per the official, will not call for an immediate hike in coal prices.

Recently, the Coal Controller Organization had inspected 871 samples from 386 Coal India mines, following which 40.76 per cent of the samples were downgraded while 51.55 per cent retained their earlier grade. Around eight per cent of the sample was upgraded. The entire process finally culminated in downgrade of 177 mines.

Although the company is yet to conclude the monetary impact of the mine grade process, company executives and analysts alike feel it will be in the range of Rs 1,500-2,500 crore for the ongoing fiscal year.

As per an analyst from brokerage firm, Motilal Oswal, Mahanadi Coalfields Ltd - Coal India's largest subsidiary - will take atleast Rs 400 crore topline hit while there will be a Rs 1,000-1,100 crore impact on the topline of South Eastern Coalfields Ltd, Coal India's second largest subsidiary.

"Nevertheless, it is expected that volume sales will pick up which will help Coal India maintain the topline", the analyst with Motilal Oswal said.

In April this year, the company's offtake volume jumped 6.1 per cent to 45.29 million tonne (mt) as compared to a two per cent decline in the same month of 2016.

Amit A Dixit, a research analyst with Edelweiss Research, expects Coal India to sustain this volume spurt.

"The company has reported six per cent plus year-on-year (Y-o-Y) growth for the fifth month since November 2016 led by 14 per cent YoY and 11 per cent YoY jump at major subsidiaries-South Eastern Coalfields and Northern Coalfields, respectively. We anticipate further spurt in despatches as land acquisition issues at Mahanadi Coalfields are sorted out", Dixit said.

According to a Coal India official, the demand for power is expected to go up in the onoging fiscal year that will call for higher coal offtake from the power plants, which in turn will boost sales.

Although market analysts have apparently reduced the estimated coal demand in the country by 52 mt at 918 mt for the fiscal year 2019-20, they are of the view that apparent coal demand will still increase at a CAGR of 5.4 per cent over the next three fiscal years.

"Driven by destocking and substitution of coal and pet coke imports, Coal India's dispatches will increase by 6.8 per cent to 580 mt in fiscal year 2017-2018 and by 6.6 per cent to 618 mt in the 2018-19 fiscal year", the analyst with Motilal Oswal said.

Coal India officials also predict a higher revenue realisation from auction sales in the current fiscal year which is expected to compensate for the topline loss due to mine grade revision.

"E-auction coal prices are in the process of inching up due to higher international coal prices. However, under all circumstances, if volume doesn't pick up, then we may revise the coal prices in line with global trends", the Coal India top executive said.

In January this year, Coal India had upped steel grade coal prices by 20 per cent by which it expects to add Rs. 2,986 crore to its topline in the current fiscal year. Besides, in the last fiscal year, the company had targeted to raise an additional Rs. 3234 crore by raising the average coal prices by 6.29 per cent.