This is bad news for Coal India as nearly 80% of the company's sales volumes are locked through lnog-term contracts at the notified prices.
With global commodity prices continuing to be under stress, Coal India's e-auction margin over notified prices has almost halved from 60% in FY15 to a little over 30% during FY16, according to a report sent by the coal ministry to the Cabinet.
The coal ministry note said the increase over notified price for spot e-auction of 57.40 million tonne during FY16 was 33.47% while for forward e-auction under which 5.92 million tonne was allocated, the premium over notified price dropped further to 29.44%.
This is in contrast to the average premium of 60% over the notified prices in e-auctions earned by Coal India in FY15.
The fall in margins is bad news for the mining behemoth as almost 80% of Coal India's sales volumes are locked through long–term contracts (5 years and more) at the notified prices. The rest could be sold through auctions at market-determined prices.
Coal India's realisation from e-auction has been going down steadily, from a peak of 116% premium over notified prices in October 2014 to 58% in March 2015 to 28% in July, according to a study done by Prabhudas Lilladher.
The prices, it now appears, haven't recovered from that trough.
The ministry report also pointed out that around 12% of Coal India's dues payable by the power sector, or about Rs 1,200 crore out of Rs 10,045.50 crore total is disputed, meaning there is risk to its realisation.
While the report hasn't specifically pointed out from whom this disputed amount is due, it has been widely reported that Coal India and its biggest customer NTPC were in loggerheads over quality of supplies following which the power major refused to pay up part of its dues.
Disclosure about Coal India's falling realisation comes at a time when FY17 hasn't began on an optimistic note. The production in April, the first month of the fiscal year, has dropped 3.4% from the year ago to 40.09 million tonne, while dispatches during the month fell 2.5% to 42.45 million tonne.
With Coal India intentionally cutting back on production due to subdued demand, realisation from auctions would continue to remain under pressure in FY17 also.
So, what's the way out for Coal India to maintain profitability?
"We believe there is sufficient headroom for the company to hike prices as its FSA (notified) price is still at 35% discount on average to import parity prices," brokerage house Edelweiss has said in a research report.
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