Coal India (CIL) finds few takers for coal in special e-auction, Reiterate

As per the report from India’s newspaper ” Financial Express” dtd. 8th Oct,2015, the coal ministry’s special e-auction scheme for 2015 had few bidders as companies found that the floor price fixed was too high, much above the current global prices.There were eight companies participating in the bid however the auction nearly failed to get any premium above the floor price. As per the report, MSTC could sell only 2.4mt of the 5mt offered.

The reserve price was set at 20% plus the notified price for power plants having long-term and medium-term power purchase agreements (PPAs) while for power plants having short-term PPAs or no PPAs at all, the price was set at 40% plus the CIL notified price. Dhariwal Infrastructure, Rattan India and Gupta Energy were the only ones that lifted 51 rakes of equivalent coal at a 40% plus reserve price, Adani Power, DB Power, Jindal Power, WBPDCL and NTPC lifted 124 rakes of equivalent coal at a 20% plus reserve price.

As per the report G-13, G-11 and G-7 grades of coal were offered for e-auction sales at a floor price (CIL notified price +20% of notified price) of Rs 732, Rs 840 and Rs 1,680 per tonne respectively on which the maximum premium commanded was Rs 20 per tonne for G- 13 and G -7 grades of coal. The G- 8 grade of coal didn’t get any premium. NTPC took G- 7 grade and lifted the highest quantity – 50 rakes at a less than 1% premium. The coal with 40% plus notified price had to be sold at the floor price. The special scheme was aimed at supplying coal to the power plants which were stressed or in short supply of coal even after receiving the fuel through fuel supply agreement, captive mines imports and normal e-auction. Independent power plants, PSU power plants and state government-run power plants, which were commissioned and were being commissioned in 2015-16, were only eligible to participate in the scheme. Their procurement was limited to the extent of shortfall between its normative requirement and availability of coal from all sources.

Our View

This reinforces our view that abundant supply of coal will keep auction prices suppressed due to weak global / domestic demand . Rising share of renewable and clean fuel / gas based power plants globally are also keeping international coal prices at 7 years lows. We expect prices to continue to remain weak as underlying supply situation and demand shift to alternative fuels are not going to change in hurry as expected by some people. China’s coal imports has reduced by about 28% YOY for Jan-Aug 2015 to 115mt. We also believe that ongoing demand reduction and subsequent decline in coal imports by China will divert the surplus coal to countries like India, Japan, Korea which will keep coal prices weak for long term. As such any attempt by Coal India to increase auction prices will fail as consumers will shift to better and cheaper imported coal. We reiterate SELL on Coal India (TP-Rs 300) valuing it at 15x FY17E EPS of Rs20.3.