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E-auction at risk?
The EGOM meeting on July 2
nd
will discuss the demand of end-users that Coal
India (CIL) should resort to e-auctions only after meeting the normative
requirement of end-users. CIL, though, is asking for removal of the 10% cap
on e-auction volumes. Given the original intention of CIL’s e-auction policy –
provide a transparent source of coal supply to small consumers – we view a
complete end to e-auctions as unlikely but don’t rule out a lower cap getting
imposed on the same. Maintain O-PF.
End-users asking for a reduction in e-auction sales
In the June 6
th
meeting convened by the Coal Ministry, various end-users of coal
said that CIL should sell coal via e-auctions only after satisfying the normative
requirement of users. The underlying insinuation here is that CIL is selling eauction coal by compromising on its existing FSA commitments. Most end-users
had complaints about the quality of coal received from CIL and some end-users
wanted a rollback of the 30% hike in prices for non-power customers.
CIL, in turn, wants to increase e-auction volumes
CIL’s contention is that ~80% of e-auction coal is primarily transported by road
and even if e-auctions stop, there is not enough rake availability to take that coal
to power plants. Power plants primarily depend on rail/MGR for coal transport. It
says that coal stocks will rise if e-auctions end, which also has safety risks since
coal can catch fire if exposed to open air for too long. CIL has in fact upped the
ante and has asked for the 10% cap on e-auction sales to be removed, which to
us seems more of a bargaining ploy. In fact CIL already sells more than 10% of
coal via e-auctions (11.8% in FY11).
Complete end to e-auctions is very unlikely but a lower cap is possible
CIL started selling coal via e-auctions to provide a transparent system of coal
supply to non-linked small consumers. We believe that e-auction was also aimed
at reducing the influence of the grey market in sales to smaller customers. These
motives still hold. However, due to rising mismatch between coal demand and
supply, large consumers are also taking part in the e-auction process. Power
producers account for 12-15mt (25-31%) of e-auction volumes. It is possible that
CIL might be asked to reduce e-auction volumes to the extent of what power
producers are buying right now. However, this still does not solve the issue of rake
unavailability, which could hinder diversion of e-auction coal to power plants.
Nonetheless, we view a complete end to e-auction sales as unlikely. Worst-case,
every 1% drop in e-auction proportion hits EPS by 1.8% but CIL always has the
option of taking offsetting price hikes. In a market plagued by rising domestic and
global risks, we view CIL as a good defensive. Maintain O-PF.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
E-auction at risk?
The EGOM meeting on July 2
nd
will discuss the demand of end-users that Coal
India (CIL) should resort to e-auctions only after meeting the normative
requirement of end-users. CIL, though, is asking for removal of the 10% cap
on e-auction volumes. Given the original intention of CIL’s e-auction policy –
provide a transparent source of coal supply to small consumers – we view a
complete end to e-auctions as unlikely but don’t rule out a lower cap getting
imposed on the same. Maintain O-PF.
End-users asking for a reduction in e-auction sales
In the June 6
th
meeting convened by the Coal Ministry, various end-users of coal
said that CIL should sell coal via e-auctions only after satisfying the normative
requirement of users. The underlying insinuation here is that CIL is selling eauction coal by compromising on its existing FSA commitments. Most end-users
had complaints about the quality of coal received from CIL and some end-users
wanted a rollback of the 30% hike in prices for non-power customers.
CIL, in turn, wants to increase e-auction volumes
CIL’s contention is that ~80% of e-auction coal is primarily transported by road
and even if e-auctions stop, there is not enough rake availability to take that coal
to power plants. Power plants primarily depend on rail/MGR for coal transport. It
says that coal stocks will rise if e-auctions end, which also has safety risks since
coal can catch fire if exposed to open air for too long. CIL has in fact upped the
ante and has asked for the 10% cap on e-auction sales to be removed, which to
us seems more of a bargaining ploy. In fact CIL already sells more than 10% of
coal via e-auctions (11.8% in FY11).
Complete end to e-auctions is very unlikely but a lower cap is possible
CIL started selling coal via e-auctions to provide a transparent system of coal
supply to non-linked small consumers. We believe that e-auction was also aimed
at reducing the influence of the grey market in sales to smaller customers. These
motives still hold. However, due to rising mismatch between coal demand and
supply, large consumers are also taking part in the e-auction process. Power
producers account for 12-15mt (25-31%) of e-auction volumes. It is possible that
CIL might be asked to reduce e-auction volumes to the extent of what power
producers are buying right now. However, this still does not solve the issue of rake
unavailability, which could hinder diversion of e-auction coal to power plants.
Nonetheless, we view a complete end to e-auction sales as unlikely. Worst-case,
every 1% drop in e-auction proportion hits EPS by 1.8% but CIL always has the
option of taking offsetting price hikes. In a market plagued by rising domestic and
global risks, we view CIL as a good defensive. Maintain O-PF.
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