Coal India's E-Auction Plans May Not Boost Profits, Says Citi
Relaxation of rules and increased coal availability may lead to higher sales, but lower prices could offset gains, according to research note.
Coal India's decision to increase e-auction volumes may not lead to higher profits, as the benefit of selling more coal through auctions may be offset by lower prices for those sales, according to Citi.
Whilst the increased share of e-auction volumes could lead to a decline in the e-auction premium, the impact on the company's profitability will depend on the quantum of additional sales through the e-auction route, the research firm noted.
Citi's research note follows Coal India's announcement on Friday that it has relaxed e-auction rules, including reducing the deposit requirement and increasing coal availability. The company plans to revise its auction and allocation process to boost participation.
Some of the other changes include lowering the deposit for e-auction from Rs 375 per tonne to Rs 112.50 per tonne, a three-hour auction window, allowing consumers to change their mode of transport after bidding, and allowing four bids from a single bidder.
Currently, Coal India operates a single e-auction scheme, allowing consumers to choose their preferred coal transport mode.
If Coal India's efforts are successful, the share of e-auction volumes could increase to around 30% of total volumes, compared to a range of 9-17% over the past 15 years, averaging around 12%, the international brokerage firm noted.
According to Citi, a higher share of e-auction volumes has historically led to lower premiums on e-auction coal prices compared to fixed supply agreement prices.
In the fiscal 2017, 2018, 2021, and 2022, when e-auction volumes were 17% of sales, the premium averaged 34%, Citi noted, adding that in the first half of fiscal 2023, with e-auction volumes rising to 19%, the premium dropped to 14%. In contrast, during fiscal years 2023 and 2024, when e-auction sales were lower at 11%, the premium to FSA prices doubled, the brokerage house added.
With the new norms introduced, Coal India's share of e-auction volumes is now going to be substantially higher than in previous years, the research firm noted, adding that it could result in the e-auction premium declining further.
Citi expects a 1% change in e-auction pricing to impact Ebitda/net profit by 0.4%, and a 1% change in e-auction volumes to impact Ebitda/net profit by 0.15%. "We assume e-auction volumes at around 10% of Coal India's total volumes in the current and the next financial year, and assume e-auction realisations at Rs 2,400 per tonne," Citi said.
