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Coal India may miss output target

Despite state-owned Coal India raising its daily average output to touch 1.8 million tonnes (mt), which is likely to scale up further to 2 mt shortly, the coal behemoth is likely to miss its annual production target of 600 mt for 2017-18.

Analysts said at its best, Coal India would during December-March be able to mine 240 mt of coal, which would take the total production to around 570 mt, 5 per cent short of the target.

“It is most likely that there is going to be a 25-30 mt production shortfall. In the recent past, the company has been missing its targets,” said Rupesh Sankhe, research analyst with Reliance Securities.

During the first eight months of the current financial year, the company was able to produce 329.31 mt, or 55 per cent, of the 600 mt target. Production of the remaining 45 per cent in a four-month timeframe will be a tough task for the miner.

Coal India executives, however, are optimistic about the increase in production and aim to cross the 2 mt target set by the coal ministry. However, the company faces serious law and order and land availability issues, environmental clearance delays and lack of evacuation infrastructure in its key Mahanadi Coalfields and Central Coalfields areas which may cap its production capacity.

Even when demand for coal peaked during October-November as the country’s power plants faced coal starvation, Coal India was able to complete 93 per cent of the targeted 49.47 mt in October and failed to meet the target of 54.91 mt by 7 per cent in November.

However, on a year-on-year basis, production grew by 1.8 per cent during the April-November period.

Fulfilling the production target is directly linked to the company’s profitability and is especially important after the wage revision. In case the production target is not met, the projected revenue is not generated. This year, Coal India signed its 10th wage agreement which will have a Rs 5,700 crore annual impact on the company’s finances. Although some provision has been made to cater to this increased cost, the company needs to generate enough income.

Sources said the coal ministry had instructed the company to stick to the target in order to absorb the increased outgo as the result of the wage agreement.

However, Sankhe said the demand for coal was less than expected and would stress its earnings.

“It was previously projected that the power industry would grow by 9-10 per cent which would drive volumes in Coal India. However, the revised estimate of growth in the power sector is 6-7 per cent. Naturally, it will affect the demand for coal,” Sankhe said.

Another analyst with Motilal Oswal said state electricity distribution companies (discoms) were expected to make capex announcements following their rescue under the UDAY scheme.

During April-November, electricity generation from thermal sources was 98.91 per cent of the 6,88,485 BTU target.

As a result, analysts project Coal India will miss is sales target too. During April-November, the miner’s total offtake stood at 367.98 mt, which is 3 per cent lower than the targeted 378.27 mt.

Faced with this situation, Coal India is now planning to improve its bottom line. In August, it revised sizing charges, rapid loading silo charges and additional charges for supply of slack and steam coal which assured it an additional Rs 527 crore of revenue. In December, it introduced evacuation facility charges at Rs 50 per tonne. The new charges are expected to fetch Rs 800 crore during December-March and during 2018-19 Coal India is expected to earn Rs 2,500 crore.

According to analysts, these revisions will directly benefit the profitability of the world’s largest coal miner and pull up profitability by 15-20 per cent.

Besides, the premium over the notified price in e-auctions increased to 76 per cent while sales volumes rose to 9 mt in October.

“On account of import substitution and global prices firming up, both prices and volumes have started improving as compared to the previous few months. It is expected that this trend will continue, which will have a direct effect on our margins,” a Coal India executive said.

The company has projected total sales via e-auctions at around 100 mt in 2017-18.
Source: Business Standard

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