Coal India Limited (NSE:COALINDIA) is the largest coal producer in the world, operating through eight subsidiaries in 84 mining areas across eight states of India. The company has a total of 290 operational mines, with 97 of them producing more than one MT per year. In this report, we will analyze the company’s recent performance and future prospects based on the data provided.
Coal India Limited (CIL) has reported its best-ever production figure of 622.63 MT in FY22, registering a growth of 4.4%. The highest ever offtake was recorded at 661.9 MT. This is a positive sign for the company, indicating that it is able to meet the growing demand for coal in the country. CIL is presently operating 13 coal washeries, with a total washing capacity of 24.94 MTY. Out of these, 11 are coking coal washeries and the remaining two are non-coking. This helps the company to produce high-quality coal, which is in great demand in the power and steel sectors.
CIL is the largest coal supplier to India’s power sector. The government’s plans to increase coal production to substitute imports, which stood at more than 200 MT, could help CIL to register sustainable volume growth over the next couple of years. This is a positive sign for the company, indicating that it is well-positioned to meet the growing demand for coal in the country. CIL has been focusing on cost control initiatives, such as the reduction of manpower. Employee cost accounts for 53-54% of the company’s overall cost. This could expand margins and help the company to maintain profitability in the long run.
CIL last raised prices in FY18. Due to higher fuel costs and wage revisions, the company could take a call to hike prices in the near to medium term. This could help the company to cover the increased wage bill and leave room for margin expansion. CIL has targeted 1 Bn Ton (Bt) production for FY24E to meet the coal demand of the country. To achieve this target, the company has identified major projects and assessed other related issues such as requirements of EC/FC, land, evacuation constraints, among others. Among the various projects, the company has identified projects such as enhancement of equipment, revival of fertilizer plants, land acquisitions, and modernization of plant and equipment, etc. CIL’s production has increased to 479.04 million tons (MT) in April-December 2022, compared to 413.6 MT in Apr-Dec 2021. This is a positive sign for the company, indicating that it is able to meet the growing demand for coal in the country.
CIL owns 48% of India’s proven coal reserves in its command area and accounts for the bulk of the domestic coal production. CIL will continue to enjoy its monopoly status over the medium term. The company contributed ~80% of domestic coal production in FY22. Nearly 81.5% of its coal production serves the power sector, with the remaining supporting the steel, fertiliser and other sectors. Despite being a monopoly in the Indian market, the company’s stock has underperformed over the past decade, although it has consistently paid attractive dividends.
In Q3FY23, CIL posted strong financial results, with consolidated revenue of Rs 35,169 crore, a YoY increase of 23.7%. EBITDA grew by 52.2% YoY to Rs 10,389 crore, supported by strong revenue and a higher EBITDA margin of 29.5% in Q3FY23. The company’s net profit increased by 71.1% YoY to Rs 7,756 crore, with a net profit margin of 22.1% in Q3FY23. CIL’s production increased to 180.064 MT in Q3FY23, a YoY increase of 10%, and its offtake (including purchased coal) increased to 175.789 MT in Q3FY23, a YoY increase of 1.2%. The company dispatched 157.83 MT through Fuel Supply Agreements (FSA) and 14.65 MT through e-auction, with an average realization of Rs 1481.9/ton and Rs 5046.08/ton, respectively.
CIL enjoys a strong financial profile, with high financial flexibility and better productivity in terms of output per man-shift through increased outsourcing and capital expenditure. Despite being impacted by lower offtake in FY20 and FY21, CIL’s operating profit before depreciation, interest and taxes (OPBDIT) margin was 22.5% in FY22 compared with 20.7% in the previous fiscal. The company’s liquidity position is expected to remain strong owing to healthy cash accruals aided by control over receivables. CIL’s dependence on coal is likely to increase in the near term, and the company’s board has given in-principle approval to divest a 25% stake in Bharat Coking Coal Ltd (BCCL) and awaits the government’s nod. A stake sale and a potential listing could help unlock value for the company
The company had total cash and cash equivalents of approximately Rs. 36,000 crore, compared to Rs. 21,000 crore as of March 31, 2021. CIL has a comfortable debt position and has the ability to raise debt and equity capital from the capital markets. In FY22, CIL made a strong dividend payout of approximately 60% with a dividend yield of approximately 7.8%. The company is expected to pay a dividend per share of Rs. 27 for FY23E, FY24E, and FY25E, respectively.
In terms of projects, CIL completed 5 coal projects with a sanctioned capacity of 12.6 MTY and sanctioned capital of Rs. 1769 crore, with a total completion capital of Rs. 1728 crore in FY22. The company is currently working on 117 coal projects with a sanctioned capacity of 918.86 MTY and a sanctioned capital of Rs. 132,634 crore. Out of these, 75 projects are on schedule, and 42 projects are delayed due to delay in FC, possession of land, and issues related to R&R. CIL has also sanctioned 16 mining projects with a sanctioned capacity of 99.84 MTY and sanctioned capital of Rs. 18309 crore in FY22. Additionally, three non-mining projects with a sanctioned capital of Rs. 5551 crore were approved in the same year.
The company is primarily engaged in the production and sale of coal, but has recently diversified into various other sectors including Chemical & Fertilizer, Coal Gasification, Aluminium Smelting, Solar Power, and Thermal Power generation. One of the major projects undertaken by CIL is the setting up of a natural gas-based ammonia-urea complex at Gorakhpur, Sindri, and Barauni. The project is being executed through a joint venture company called Hindustan Urvarak & Rasayan Ltd (HURL), which comprises CIL, NTPC, IOCL, FCIL, and HFCL. The three plants are being set up with an estimated cost of around Rs 25,000 crore, and the Gorakhpur unit has already been commissioned in December 2021. The Sindri and Barauni units are also nearing completion and scheduled to be commissioned shortly.
CIL is also involved in setting up a coal-based ammonia-urea complex at Talcher through a joint venture company called Talcher Fertilizers Ltd (TFL), which comprises RCF, CIL, GAIL, and FCIL. The plant will be set up at an estimated cost of Rs 13,277 crore and is expected to produce syngas from coal blended with pet-coke up to 25%. The syngas will then be converted into neem-coated urea equivalent to an annual capacity of 1.27 Mn Metric Ton of the end product. As of March 31, 2022, the overall progress of the project is at 22%, and the plant is expected to come into operation in FY25.
The company has faced several challenges in recent years which have impacted its growth prospects. One of the major challenges that Coal India faces is the changing macro-economic scenario which could impact its growth plans. Factors such as an economic slowdown, volatility in global coal prices, natural calamities in consuming and/or producing regions and regulatory changes in coal as well as power industry could impact its growth story in the future. CIL needs to keep a close watch on these factors to ensure that it is able to continue its growth momentum. The government and various committees have suggested not adding more coal-fired plants keeping in view its commitment to become carbon neutral by 2070. This could impact coal demand going forward, as Coal India is the largest producer of coal in India. CIL needs to explore alternative markets for its coal to ensure that it is not impacted by this development.
Coal output from the company has remained nearly stagnant over the past few years due to various issues such as poor land acquisition, R&R issues, encroachment issues, delay in forestry and environmental clearances, evacuation and logistics constraints, law and order problems, and heavy rainfall witnessed in the coal mining areas. The company has been missing its target continuously and it is a key challenge to solve the production issue. Lower-than-expected volume offtake and realization from e-auction could impact margin and earnings outlook. CIL needs to address these issues to increase its production capacity and improve its financial performance.
Apart from governance challenges, Coal India has almost no control over the price at which it sells its product. Lack of pricing power has also impacted the performance. Coal India is unable to increase prices of its product due to the belief that its consumer — power producer and power distribution companies cannot afford it. Power tariffs have been kept low due to political reasons and quality and uninterrupted power is denied to the consumers under the garb that they cannot afford it. The company needs to find ways to increase its pricing power to improve its financial performance.
Addition in renewables would make 65-70% in the total energy basket over the next five years, it could impact the growth outlook of thermal power projects, which is based on coal. CIL needs to evaluate its growth prospects in the light of this development and explore alternative markets for its coal.
CIL’s profitability could fall in the near to medium term due to a recent wage hike to a combined 2.8 lakh non-executive employees unless coal prices are revised upwards. The company needs to explore ways to increase its revenue to offset the impact of the wage hike. Any material adverse impact of changes in India’s coal policy, pricing policy, land acquisition could affect its operation going forward. The company needs to keep a close watch on these developments and be prepared to adapt to any changes in the regulatory environment.
Under CIL’s flagship ‘First Mile Connectivity Projects (FMC)’, 44 projects have been identified for implementation in two phases, which will upgrade the mechanized coal transportation and loading system. The FMC Projects will help increase mechanized evacuation from 151 MTPA currently to 622.5 MTPA. In the first phase, out of the planned 35 FMC projects of 414.5 MTPA capacity awarded at a capital investment of Rs. 10,750 crore, 6 FMC Projects of 82 MTPA capacity have been commissioned till 31st Mar’ 2022.
Overall, CIL has shown strong financial performance and has several ongoing projects that are expected to increase its capacity in the coming years.
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