Coal India: A Black Diamond

Coal remains the predominant indigenous energy source in the country. As such, Coal India is in a strong position to continue being a leading player in this segment while contributing to satisfy the power needs of the country 

Coal India Limited (CIL) is the single-largest coal producer in the world and one of the largest corporate employers with manpower of 259,016. CIL functions through its subsidiaries in 85 mining areas spread over eight states of India. The company has 345 mines of which 151 are underground, 172 open cast and 22 mixed mines. CIL is presently operating 13 coal washeries with a total washing capacity of 35.38 MTY. Out of these, 11 are coking coal washeries and the balance two are non-coking. It also manages other establishments like workshops, hospitals, and so on.

CIL is a Maharatna company – a privileged status conferred by the Government of India to select state-owned enterprises in order to empower them to expand their operations and emerge as global giants. The select club has only 10 members out of more than 300 central public sector enterprises in the country. The company operates with product categories like coking coal, semi-coking coal, non- coking coal, washed and beneficiated coal, middlings, rejects, CIL coke, LTC coke, coal fines and coke fines, and tar, heavy oil, light oil and soft pitch.

Sector Overview

Coal remains the predominant indigenous energy source in the country. The energy security of the country and its prosperity are linked to efficient and effective use of this abundant, affordable and dependent fuel. The dependability on coal may be gauged by the fact that about 55 per cent of India’s installed power capacity is coal-based. CIL produces around 83 per cent of India’s overall coal production in India and meets about 40 per cent of primary commercial energy requirement. Coal has a major role to play in India’s objective to increase its power generation capacity in the coming years.

This is because a significant portion of the capacity is expected to come from coal itself. As of now, the share of coal in the overall energy mix is expected to remain high at 48-54 per cent even beyond 2030. In spite of the penetration of the renewable sources, the demand for coal shall remain bullish even if its share in the energy mix may reduce. In terms of availability, coal is the most abundant fossil fuel available in India. The geological resources of coal in India are in excess of approximately 344 billion tonnes.

Considering the current rate of production, the reserves are sufficient to meet the demand for multiple centuries to follow. The Government of India is focused on providing access to clean, cheap and sustainable electricity to the entire population. Though the proportion of non-coal sources, particularly renewables, has increased over the last few years, coal is expected to remain the dominant fuel source for electricity generation in India in the near future as well.

Financial Overview

As regards the performance of the company in terms of financials, for the first quarter of FY22, on consolidated basis, the company recorded net sales and other operating income of Rs 25,282.15 which increased by 36.76 per cent from Rs 18,486.77 crore reported in Q1FY21. The operating profit was registered at Rs 5,524.87 crore in Q1FY22 as compared to operating profit of Rs 3,836.74 crore in Q1FY21, zooming upward by 44 per cent.

Q1FY22 recorded net profit of Rs 3,175.22 crore as compared to net profit of Rs 2,078.57 crore in the same quarter in the previous year, registering gain of 52.76 per cent.

On the annual front, its net sales and operating income de-grew by 6.3 per cent from Rs 96,080.34 crore in FY20 to Rs 90,026.01 crore in FY21.The operating profit contracted by 20.2 per cent in FY21 as compared to FY20. The net profit declined by 23.93 per cent in FY21 at Rs 12,705.14 crore as compared to Rs 16,701.51 crore in FY20. Despite many hardships due to the second wave of the pandemic, coal production was 124 MT with growth of 2.4 per cent. Coal off-take was also at a record high of 160 MT with a good growth of 33 per cent. The company reported that it liquidated a record 36 MT of coal stock during Q1FY22.

During FY21, the production of coal was recorded at 596 million tonnes across the 345 working mines. The company is working on ongoing projects to further ramp up the production. In terms of reserves, it possesses 178 billion tonnes of resources and 54 billion tonnes of reserves. Coming to the margins and returns, in Q1FY22 the EBITDA margin stood at 23 per cent whereas in FY21 it stood at 25 per cent. The return on average shareholders’ equity worked out to 37 per cent in FY21. On the other hand, the last five years’ average dividend payout ratio of the company worked out to 72 per cent.

Coal’s Contribution to India’s Growth

Let’s understand the importance of coal by considering two scenarios: If the coal demand is predicted to increase by 6 per cent from FY22 onwards, it will result in a total coal demand of all-India reaching 1,250 MTPA by FY30. On the other hand, considering a growth of demand in coal at 8 per cent from FY22 onwards, the all-India total coal demand is estimated to reach 1,500 MTPA by FY30. These figures are after taking into account the expansion of renewable energy (RE) capacity from 123 GW in FY19 to 450 GW in FY30.

RE and coal will co-exist due to diversity in the demand curve in India and reliability of coal power. Despite higher incremental share of RE, coal (cleaner) demand will continue. Coal India aims to continue to play a key strategic role to provide for India’s energy demand as it moves to a higher trajectory in consonance with people’s aspirations. CIL is focused towards its commitment of 1 billion tonnes of coal production by FY24. During Q1 of FY22, power demand witnessed recovery as compared to Q1 of FY21.

Coal India aims to continue to play a key strategic role to provide for India’s energy demand as it moves to a higher trajectory in consonance with people’s aspirations. CIL is focused towards its commitment of 1 billion tonnes of coal production by FY24

Coal-based generation also followed a similar trend. The Central Electricity Regulatory Commission defines plant load factor (PLF) as a percentage of energy sent out by the power plant corresponding to the installed capacity in that period. A higher PLF will generate a greater total output which will reduce the cost per unit of energy generated. As per the Central Electricity Authority of India (CEA), thermal PLF reached 67 per cent (provisional) in March 2021 and April 2021 as compared to 42 per cent and 48 per cent recorded in March 2020 and April 2020, respectively.

Outlook

As per IEA’s India Energy Outlook 2021, even though coal’s share in India’s total primary energy demand is predicted to steadily decline in percentage terms from 44 per cent in 2019 to 34 per cent in 2040, the demand for coal is estimated to advance by 31 per cent over the same period in absolute terms from 413 MTOE in 2019 to 541 MTOE in 2040. Coal India has charted some key value propositions for a brighter future:

•Peak coal production of 606.89 MT in FY 2018-19 with a target to achieve 1 billion tonnes by FY 2023-2024.
•Improving manpower productivity significantly.
• Mechanisation and closure of unviable mines to lower costs.
• Evacuation and transportation infrastructure improvement.
• Improved ESG compliance and disclosures. n Predictable capital allocation.
•Experienced management team.
• Aim to be a ‘net zero emission’ company at the earliest.

CIL reports that there are 18 mining projects having a capacity of 144 MTY which are to be approved in FY22. Out of these, two mining projects have been approved by CIL and its subsidiaries in Q1FY22 with a rated capacity of 36 MTPA and sanctioned capital of Rs 3,389.95 crore. In order to have a seamless evacuation system for the projected production, an action plan to enhance and strengthen the infrastructure of coal evacuation for existing, ongoing and future projects of subsidiary companies is being worked on. Rail infrastructure is being built both on ‘deposit basis’ as well as by forming SPVs with rail PSUs and the concerned state governments.

Also, CIL has taken steps to upgrade the mechanised coal transportation and loading system under its ‘first mile connectivity’ projects. Currently, CIL incurs around Rs 3,900 crore on transportation charges annually. This is predicted to decline substantially with the improvement of first mile connectivity through mechanisation. Coal India Limited, a pure play supplier of coal, is therefore well-positioned to cater to the high demand for coal in India. It bears strong financial credentials and strong capabilities for exploration, mine planning and operations. Hence, we recommend BUY.