What was introduced by the government five years back as a tool to help coal consumers in the small non-core sector, has turned out to be a cushion for the largest coal producer in the world against flat production.
The contribution of spot sales of coal or e-auction, to Coal India's overall revenues has seen a sharp rise from 11.9 per cent in 2007-08 to 17.5 per cent last financial year, even as its contribution to overall volume of coal sold remained stagnant at 10 per cent over the four-year period. This is a result of an over 37 per cent jump in the average sale price at e-auction from Rs 1,346 a tonne to Rs 1,846 during the same period. Thanks to the historic coal shortages, which marked this phase, forcing buyers to opt for the costly e-auction coal.
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In the last financial year (2010-11), Coal India sold coal through e-auction at a premium of a whopping 81 per cent over the average notified price of Rs 920 a tonne. E-auction coal had fetched at a premium of 63 per cent over the same average notified price in 2009-10.
The company contributes over 80 per cent of India's domestic coal production of 530 million tonnes (mt) annually. While its production remained flat at 431 m last financial year, the company posted a 12.9 per cent jump in net profit in 2010-11 at Rs 10,867 crore owing to higher realisation from selling coal at market price. E-auction accounted for Rs 8,810 crore or 17.5 per cent of overall sales of Rs 50,233 crore.
Experts believe with shortages in coal availability unlikely to subside soon, the boost to Coal India's profitability as a result of increased realisation from e-auction sales is here to stay. "This is a challenging situation because increased e-auction prices are a result of the current supply deficit created by the delay on the part of the government to sort out critical issues surrounding the coal sector in India. In a strange fashion, therefore, e-auction route has ended up boosting profitability despite reports of supply shortfalls under the linkage route," said Kuljit Singh, partner at accounting and consultancy firm Ernst & Young.
He said the trend has likely to continue in the short to medium term as developing a new coal mine takes five-seven years in India.
There is, however, a flip side to the whole strategy of letting spot sales account for a majority of revenues. "Heavy reliance on e-auction sales could create a risk for Coal India's revenues in case of any drop in demand," said Gokul Chaudhri, partner, BMR Advisors.
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The ongoing shortages in coal availability for power plants have already prompted the power ministry to demand a temporary stoppage of e-auction sales and divert supplies to the power sector.
Earlier, too, higher prices realised at the electronic trading of coal had acted as a stumbling block for e-auction when the Supreme Court, in December 2006, dismissed the scheme as a misuse of CIL's monopoly status to seek higher prices rather than fulfilling its constitutional goals. This was followed by the government scrapping the floor price for bidding under e-auction in the new coal distribution policy notified in October 2007 and fixing the notified price as the floor price for sale of domestic coal. E-auctioning had resumed in November same year.
Coal India's share price at the Bombay Stock Exchange on Monday closed at Rs 395.7, down 2.1 per cent as compared to the previous close.