Stock Analysis of Coal India Limited – Overview
From the author: Despite sluggish growth and bad sentiment created by the coal scam, Coal India has managed to remain in the top 5 Indian companies (based on market capitalization). Over the last 5 years Coal India has underperformed both the Sensex and the top 10 companies in India – see full research here. Last month (January 2014) the Company generated enormous market interest by declaring an interim dividend of Rs. 29 per share and remained one of the most frequently traded scripts in the F&O (derivatives) segment of the market. The factors considered below present an overview of Coal India Limited.
Disclaimer: The stock analysis presented below should not be taken as a buy/sell recommendation. The circumstances of the company and the economic environment may have changed since the date of this stock analysis.
What’s driving the stock
Largest producer of coal in the world, dominant position in India
Coal India Limited (“CIL” or the “Company”) is the largest producer of coal in the world based on its raw coal production of 452.21 million tons in FY 2013. The Company mainly focuses on its domestic market – India, where it enjoys a monopoly position. With 81 % of the country’s total coal production and the restriction of foreign company participation in the Indian coal sector, Coal India has a distinct advantage of being a dominant player in the domestic coal industry. The Company possesses the largest coal reserves in the world based on its reserve base of 18,862.9 million tons of total Reserves as of April 1, 2013 the next biggest player is China Senhua Energy whose reserve base is 7,562 million tons. Given its monopoly position, we expect that the Company will continue to serve over 80 % of domestic market despite increased captive mining by major clients.
Well positioned to capitalize on high domestic demand for coal
Energy is a prerequisite for the economic development of any country. In developing countries, the energy sector plays a critical role due to the ever increasing energy needs. Coal dominates India’s energy mix, accounting for nearly ~ 55 % of the total energy consumption in India.
The demand for coal has risen by about 8.0% per annum during 2007-13 and is expected to rise by about the same magnitude during the Twelfth 5 year Plan (2012-17). About 70% of the coal in India is consumed in the power sector. Under the Twelfth Five-Year Plan, India plans to add power generation capacity of 100 GW which will include 28 GW of capacity from projects which were supposed to be completed in the Eleventh Plan. Given the strong growth in thermal generation projected in the Twelfth Plan, the aggregate demand for coal at the end of the Twelfth Plan is likely to be between 900 and 1,000 million tonnes depending upon the speed of implementation of power capacity.
In addition, other industries like steel, cement, fertilizers, chemicals, paper and thousands of medium and small-scale industries are also dependent on coal for their process and energy requirements.
In the 12th five year plan, import dependence in coal is projected to increase as the growth of thermal generation will require coal supplies which cannot be fully met from domestic mines. Thus, there is huge scope for Coal India to enhance their domestic supply in the market and tap the coal driven market by reducing the level of imports.
At present, Coal India operates 17 coal washeries with a total capacity of 39.40 MTPA. The Company is in the process of setting up 20 new coal washeries with a combined capacity of 111.1 MT. This capacity expansion is estimated to result in a considerable rise in production to 615 million tonnes by 2016-17. The Company has also undertaken 142 new projects that include 107 open cast and 35 underground projects with a combined production capacity of 380.22 million tonnes of coal per annum and has allocated a budget of ~ Rs. 40,000 Cr. over five years to 2017. With consumers’ increased emphasis on better-quality coal with low ash content to comply with environmental standards for low emissions, Coal India expects to supply 150 MT of better quality coal to its consumers by the end of the 2012-17 five-year plan.
Strong track record of financial performance
The Company is one of the largest profit making and tax & dividend paying enterprises in India. The profit after tax for Coal India and its subsidiaries has increased by 17.42% from Rs. 21,272.66 Cr. in 2011-12 to Rs. 24,979.04 Cr. for 2012-13. For nine months ending December 2013, the Company reported its profit after tax as Rs. 10,677.45 Cr. For FY 2013, the Company has recommended dividend payment of Rs. 8,842.91 Cr. at Rs. 14/- per share. Out of total dividend, Government of India gets Rs. 7,958.62 Cr. and other shareholders get Rs. 884.29 Cr. (Previous year, Government of India received Rs. 5,684.72 Cr. and other shareholders got Rs. 631.64 Cr.).
What’s Dragging the Stock
Use of alternative energy sources for power generation
Use of natural gas in the energy industry has been gaining significance. With increased spending on infrastructure in the oil and natural gas sector, oil and natural gas may become easily available to power generation companies, increasing their use as an alternative energy source. Further, many of the new power plants needed to meet increasing demand for Indian electricity generation may use natural gas because gas-fired plants are cheaper to construct and permits to construct these plants are easier to obtain mostly because natural gas is seen as having a lower environmental impact than coal-fired generators.
Most of the coal is used in the thermal power industry in India. Raw coal dispatch to customers in the power sector represented 79.9 %, 72 %, and 72.1 % of the total dispatch of raw coal (external sales and internal dispatch) in fiscal 2011, 2012 and 2013, respectively. The amount of coal consumed for Indian electric power generation is affected by, among other things:
- the location, availability, quality and price of alternative energy sources for power generation, such as natural gas, fuel oil, nuclear, hydroelectric, wind and solar power; and
- Technological developments, including those related to alternative energy sources.
Various changes in the regulatory framework governing the coal sector can have a bearing on Coal India’s operations. Changes in policies and regulations, such as allowing foreign direct investment in this sector, could open up the sector to major global coal producers and affect Coal India’s competitive advantage. The government’s proposal to distribute one fourth of its earnings to the mining-affected people (i.e. people who live in the vicinity of coal mines) could affect Coal India’s overall profitability. Obtaining environmental and forest clearances has been difficult in the past and affects the success of new and expansion projects. Stricter environmental regulation could also have a direct negative impact on the company’s business.
Inadequate railway infrastructure
Coal India primarily uses rail to supply coal to its consumers, accounting for more than 50 % of its total dispatches to customers, particularly for long-distance supply arrangements. Insufficient availability of railway coaches, as was the case in fiscal 2011, could lead to lower sales and higher stockpiles and affect its revenue. Non-availability of transportation prevents the company from extracting coal from mines, the demand for which will surge from power plants. The miner is not able to transport more than 2-3 MT of coal through roads. Therefore, the reserves remain unexplored.
Lower beneficiated coal production
Most of the coal available in Coal India’s reserves and produced by the company is low-quality thermal coal used primarily by the power sector. The Company is exposed to the rising possibility of its customers demanding higher-quality coal with lower ash content. Although it has initiated plans to set up modern coal beneficiation plants to meet such anticipated needs, it may not be able to upgrade on pace with the rising demand for such higher-quality coal, which may lead to market share deterioration.
Rajat Sharma is the CEO at Sana Securities, an independent equity research and financial advisory firm in India. Views expressed here are of the author and RKSV has not verified any facts stated above.