Coal India Limited

Coal India Ltd is the largest coal producing company in the world.

Market Price
as on 131.60 EPS FY20 27.10 P/E 4.86
25-07-2020
No. of Shares
(in Lacs) 6162.73 Book Value 52.82 P/B 2.50
(F.V. Rs. 10.00)

Market Cap M.cap/

81101.50 Sales 96,080.34 0.85
(in Rs. Cr.) Sales

>35% | E.value/
ROE | ROCE EBITDA 28,026.25 2.90
>45% EBITDA

22.81% |
OPM | NPM Dividend 12.00 Div Yield 9.12%
17.38%

Brief Business Profile:

CIL was incorporated in 1973 as Coal Mines Authority Ltd after the nationalisation of the
coal sector and was reconstituted as a formal holding company with the present name in
November 1975. CIL was conferred the Maharatna status by the Indian government in April
2011. The status provides operational and financial autonomy. Additionally, seven of its
nine wholly owned subsidiaries have been accorded the Miniratna status, leading to
decentralisation of operations and decision-making.
(Subsidiaries- 1) Bharat Coking Coal Ltd, 2) Central Coalfields Ltd, 3) Eastern Coalfields Ltd,
4) Western Coalfields Ltd, 5) Northern Coalfields Ltd, 6) Mahanadi Coalfields Ltd, 7)outh
Eastern Coalfields Ltd, and 8)Coal Mines Planning and Development Institute Ltd. It has a
wholly owned subsidiary in Mozambique, Coal India Africana Ltd.)

With a modest production of 79 Million Tonnes (MTs) at the year of its inception CIL today is
the single largest coal producer in the world (>600mt in FY 2020) with abundant proven
reserves (52 bn tons of proved geological reserves, life of mine 90+ yrs). CIL functions in 84
mining areas spread over eight states. CIL has 352 mines (as on 1st April, 2020) of which
158 are underground, 174 opencast and 20 mixed mines. CIL further operates 12 coal
washeries, (10 coking coal and 2 non-coking coal).

In October 2010, the government divested 10% stake in CIL @245, Further 10% stake by
OFS in Jan ‘15 @358 another 6% by OFC In Nov’18 @266. Thereafter divestment was done
by way of placement of shares in Central Public Sector Exchange Traded Fund and also by
buyback of shares in March 2019 for 1050 cr. @ Rs. 235. Government shareholding now
stands at 66.13%.
Understanding Fundamental Factors:

Demand for Coal:

As per the Coal Ministry of India, 64% coal consumption by Electricity purpose, 7% by steel
sector, 1% by cement sector and 28% by other sectors. The demand-supply model for
thermal coal implies demand CAGR of 6% over FY19-24 to reach 1.2bt.

India continues to depend on coal for ~70% of its electricity requirements, with coal-based
generation constituting 55% of the country’s installed capacity (Coal: 205GW; All-India:
370GW).

Despite the growing focus on renewables, coal would continue to dominate India’s electricity
production. Per capita electricity consumption in India remains low (1/16th of US, 1/5th of
China, and 1/3rd of world average), implying significant room for coal and renewables to co-
exist and grow. Assuming a 6.5% CAGR for power demand over FY20–25 and avg. annual
14GW of renewable capacity addition (at 20% PLF), incremental renewable generation would
be just 115BU; this is insufficient to meet even overall incremental demand (419 BU) over
the next five years.

Further, A look at the US electricity market indicates that coal-based generation has largely
been displaced by gas on the back of favorable economics for gas-based plants. Given the
lack of domestic gas supply in India, we do not foresee such a situation in the country. Also
conventional sources are not in a position to displace coal. Construction of new hydro
projects are marred with delays due to lengthy approval process and
rehabilitation/settlement related issues. Besides, even if India were to realize its true
potential of ~150GW of hydro, this would imply incremental generation (at 40% PLF) of just
390BU – which is not sufficient to even meet incremental demand over the next five years.
Nuclear generation is still at a nascent stage and accounts for ~3% of overall demand. Thus,
we believe India will continue depending on coal to meet its electricity needs.

Price:
Company’s vision is ‘To emerge as one of the global players in the primary energy sector
committed to provide energy security to the country by attaining environmentally & socially
sustainable growth through best practices from mine to market.” As a result COAL’s GCV
adjusted coal prices are at a significant discount to the import parity prices of the other
international coals. The company’s official position on pricing as per one of the
Parliamentary Standing Committee reports: 
 While fixing the prices of coal, the coal companies take into consideration general
increase in price of commodities in the market leading to increase in the cost of input
in the production of coal as reflected in Wholesale Price Index (WPI) and All India
Consumer Price Index (AICPI),

 Capacity of the company to absorb the increase in cost,

 Landed cost of imported coal,

  Impact of revision in wages of nonexecutive employees and revision in pay of
executives as per Government guidelines as and when such revision takes place,

 Requirement of additional resources mobilization for fresh investments in new projects

to augment coal production to achieve planned production target.

 Need for capital investment in new projects and modernization of existing mines to
augment coal production to bridge the demand supply gap.

 While revising the prices of coal, COAL considers its impact on overall economy
particularly the impact on Power Sector is worked out separately and it is ensured
that the impact is minimum

Unlike a private mining enterprise, COAL doesn’t spend anything meaningful to get access
to coal reserves; it is the state which allocates mines to the company. Since the state
allocates the resources, it is not unfair for the state to have the company managed in a way
that suits its obligations.

So on paper, COAL is supposed to have complete freedom on pricing, as coal is a de-

regulated commodity. But we have hardly seen the company raise prices to maximize profits
despite the substantial cushion and > 80% of volume is under FSA (In Q4 20 average
realization under FSA is Rs. 1445 (139 tone) and under e auction Rs. 2105 (21 ton).
However with decline in prices of coal margin are less affected so it’s immune to price
fluctuation in prices of coal.

Strip Ratio:

Due to favorable geological conditions, It’s stripping ratio is ~2x, considerably lower than the
global range (4- 10x), hence cost of production at < US$15/t, is in the 1st quartile of the
global cost curve. (In mining, stripping ratio refers to the ratio of the volume of overburden
(or waste material) required to be handled in order to extract some tonnage of ore) .

COAL expenses the mining overburden removal cost in its P&L based on the life of mine
strip ratio. However, the actual expenditure incurred each year (actual strip ratio) has
historically been lower (as in the earlier years it is lesser and as time passes it increase) The
difference between the two is the provision towards stripping activity adjustment account.
So as time progresses and mines get older, COAL’s strip ratio will increase beyond the
average life of mine ratio and the company will incur more cash outgo than it would expense
in P&L. As this starts to happen, the provision will start to shrink and along with it the cash
balance. COAL is actually experiencing this now in many of its older mines. However, the
provision is still increasing because the company is growing and significant incremental
production is coming from younger mines which currently have a lower strip ratio than that
of life of mine. The significance of this is that Actual cash balance is a illusion because if we
consider provisions as Quasi debt Company is in reality net debt positive.
 Reason for De-rating

 Contraction in near term Demand:

Historically, favourable geological conditions and improving productivity in terms of
output per man-shift through increased outsourcing and capital expenditure (capex)
kept the operating margin healthy over the past decade. Application of coal cess from
December 2017 and increase in price in January 2018 resulted in higher profitability
in fiscal 2019. However, the profitability was impacted in fiscal 2020 by lower offtake
(especially by the power sector) and depressed e-auction premiums. Production
declined 0.8% while offtake fell 4.3% during fiscal 2020, driven by a 5.5% drop in
demand from the power sector. For the FY 20, management guided a sales target of
660mt against that company produced 602.14mt and sold 581.41mt of coal in FY20.
There is slight miss in the sales target for this fiscal year. So COVID-19-led
lockdown in India came at a time when, power demand was largely muted and
production at Coal India’s mines had been ramped-up post a heavy monsoon season.
Accordingly, inventory has increased at both coal mines and power plants. On
account of such a sharp demand drop and higher coal inventories at power plants,
there will be lower dispatches for COAL in FY21. (Further While there will be a
decline in coal imports (especially from the non-power sector), a subsequent fall in
global coal prices may pose a risk and eventually impact COAL’s e-auction
realizations and so Profitability will be impacted as in the near term volumes under
FSA and e-auction realizations to be under pressure
With expected recovery of demand from the power sector, volume and profitability
should increase from the third quarter and remain healthy over the medium term.
Meanwhile, reduced demand will continue to constrain e-auction premiums in fiscal
2021 before recovering in 2022.

 Cash Flow: Coal India’s receivables have increased significantly from ~ | 5500 crore
at the end of FY19 to ~| 14400 crore at the end of FY20. The situation is unlikely to
improve till September 2020. Further, CIL recently allowed usance letters of credit
(LCs) as a form of payment for coal supplies so, Receivables are expected to increase
to | 18000 crore at the end of June 2020 and further to ~| 21000-22000 crore at the
end of September 2020. Liquidity has also tightened due to problems at the DISCOM
level, which have flowed to the generators. State generation companies are not in a
position to pay. On expectation of increase in demand post October 2020, the
company expects some improvement in receivable situation. As a result operating
Cash flow will be minimal after adjusting for planned capex in next fiscal. Further, as
market price has reduced substantially, Government might divest stack through
Buyback further affecting Liquidity.

 Cost proportion: A large proportion of Coal India’s costs are fixed in nature, with
employee costs accounting for ~50% of the company’s expenses. Furthermore, with
the company focusing on OBR-removal activities, contractual employees would
continue to be utilized, in our view. Thus, with lower dispatches, negative operating
leverage would kick in.
 Quality of Coal: It believes with the quality of coal available, it can export only to
Bangladesh, Nepal, and Bhutan. Among these, Bangladesh has the potential for
some coal requirement for its power plants, along with certain cement factories in
Bhutan and Nepal. However, it is not looking at exports currently. Transportation
costs may be an issue for dispatching coal beyond these countries as Indonesian coal
is of better quality and may prove cheaper.

 Capital Allocation: Proposed investments into other businesses like UMPP,

fertilize/urea plant, solar plant etc. This is disillusioning given the core capex itself
isn’t yielding incremental NOPAT as although it is called capital expenditure it is
sustenance in nature or back ended, or unproductive. Capex is being incurred for
plant & machinery, land acquisition, mining infrastructure, railway sidings and so
on. More land is needed to scale up production, while more plant, equipment &
machinery are needed for increasing output at a time when the manpower is
declining. Though plans for other businesses are in the preliminary stage, with no
significant investment expected over the medium term.

 Sustainability: we note that the decline in COAL’s valuation coincides with a fall in
valuations of coal mining companies globally. Recent announcements of mining
companies to cap/exit coal production have raised questions on the sustainability of
coal. Thermal coal consumption in the US (the third largest consumer) is now at less
than two thirds of its 2010 levels, while consumption growth in China (largest
consumer) has been subdued Against this backdrop and the increasing pressure to
arrest fossil fuel consumption, large global mining companies have been moving
away from coal (Rio Tinto has exited, Glencore has capped production and BHP
Billiton is looking to divest) but we must note India’s divergence from other major
coal-consuming economies (US, China) in terms of coal consumption. However from
India’s standpoint, coal is here to stay, despite increasing renewable generation
(unless storage technology develops).

Reason for Investments

 Measures by Company:

 COAL has reduced production given the build-up in inventories at its own mines
and power plants. In turn, the company is focusing on OBR (overburden
removal), which should help it improve production once situation normalize.

 Huge legacy manpower at COAL, is being reduced progressively without hurting

production. From 3.57 lakh in FY 13 to 2.72 lakh in FY 20. During FY20, the
reduction in manpower strength in CIL was ~13000 employees. The management
is aiming at a further reduction of ~13000-14000 employees in FY21E

 Land acquisition is crucial and the most challenging component of coal mining in
India. COAL has almost doubled the quantum of land acquired per year from .
2,000ha in FY10-15 to about to 4,000ha from he FY 15
 While FY21 may be muted, as power demand recovers, we expect COAL’s vols. to
recover and grow at ~5% over the medium term. Furthermore, Coal India has
begun cost cutting initiatives such as shutting down underground mines, VRS
etc. Thus, , ongoing efficiency measures along with recovery in volumes should
drive EBITDA growth marginally from FY 22.

 Government Action:
As >20% of coal are imported from other countries and Government is targeting
to reduce coal imports to zero so government has set an ambitious target of one
billion tonnes in annual production of coal by 2023-24 revised to 2025-26. In
coal production, evacuation of coal was a big issue earlier, the current regime
has done a phenomenal job in this area as In the past, volume was hit by
shortage of adequate rakes for transportation of coal and lack of last-mile
connectivity in pitheads. Consequently, two critical rail links (Tori-Shivpur, Tori-
Balumath) for transporting coal from CIL's mines were commissioned in fiscal
2019. CIL is focussing on improving the rail infrastructure in Odisha, Jharkhand
and Chhattisgarh. Also, some of the major rail projects (Shivpur-Kathotia and
Tentuloi-Budhapunk) will be implemented over the next couple of years to ease
evacuation constraints and increase the share of railways in transporting coal.
Further the government has announced an investment of Rs 50,000 crores under
Aatmanirbhar Bharat Abhiyan to create and develop infrastructure facilities for
Coal India. Also Operational flexibility has improved in the recent years with
environmental and forest clearances enabling faster implementation of stuck
projects for coal evacuation.

 Continued near-monopoly status:

CIL possesses 48% of India's proven reserves in its command area and accounts
for the bulk of the domestic coal production. While the government recently
launched auctions for 41 coal mines for commercial mining by private sector
players, From a domestic perspective, we do not expect it to dent production for
Coal India. Auctioning is yet to be kick started and given procedural hurdles
such as land acquisition and EC/FC clearances, output from such commercial
mines will take time, and therefore, CIL may continue to enjoy its monopoly over
the medium term.
Moreover, although Coal India accounts for ~82% of domestic coal production, it
meets only ~68% of the domestic demand. Thus, there exists a massive
opportunity for import substitution (~130-150mt of imported coal can be
substituted). As and when commercial mines come up, it would likely displace
these imports.
 Pricing Power:

COAL’s pricing is at a significant discount to international traded coal prices,

implying a strong pricing cushion and as it enjoys dominant position in the
Indian market with close to zero off take risk, with increase in cost the price can
be increased. And same is observed in the past as Coal India has taken a total of
9 price hikes in the last 18 years for the linkage consumers mainly to offset cost
inflation. Although, they had the cushion to do more, the typical hike averaged
~12% (in Jan 12 by 20%, May 13 by 10%, May 16 by 6% & Jan 18 by 11%, so
same can be raised from next year and it will coincide with wage hike (as The next
wage hike for executive employees is due in 2027 while for non-executive
employees, it is due from July 2021) With muted realisations and increasing debt,
the gearing is expected to increase but remain comfortable below 0.2 time as on
March 31, 2021

 Engagement of mine developer cum operators (MDOs):

Coal India Limited (CIL) board recently has given its nod in regard to standard bid
document and request for bids for the engagement of MDO of international repute,
having state-of-the-art-technology through open global tenders, who shall
excavate, extract and deliver coal to the coal companies of CIL as per the approved
mining plan to increase its coal output and reduce import dependency of the dry
fuel in the coming years. The Maharatna coal mining behemoth in the process has
identified a total of 15 greenfield projects to operate through MDO model of which
12 are open cast and 3 underground, a release by Western Coalfields Ltd (WCL) –
subsidiary of CIL – said. Combined, they have a total targeted capacity of around
168 million tonne/year (MTY). While the OC projects have a targeted capacity of
162 MTY, UG projects have close to 6 MTY. The contract period would be for 25
years or life of mine whichever is less. CIL is laying out plans to complete the
formalities by 2021-22 so that all projects become operational and start yielding
the output to contribute in 1 BT by 2026.

 Fundamental Factors:

 Despite the proposed capex, share buyback and large dividend payout, financial
risk profile and liquidity will remain strong over the medium term, backed by
robust capital structure, and healthy cash accrual.

 Company has a good return on equity (ROE) track record: 3 Years ROE 44.83%

 Company has been maintaining a healthy dividend payout giving a divind payout
of >9% at CMP.
Conclusion:
Fundamentally, unlike some of its international peers coal india operates in a growing
demand market, also given the non-cyclical nature of COA as >75% of its revenues are
under FSA and not exposed to fluctuations in global prices, and significant pricing
cushion as still FSA prices are at 30-40% discount to the market rates, it is perplexing
to see the sharp de-rating over the past 3-4 years, despite its EBITDA having doubled
from FY17 levels. While lower-than-expected production and continued government
divestment may be an overhang in the near-term, the longer-term story for COAL
remains intact.

The stock now trades attractively at ~3x FY20 EV/adj. EBITDA (v/s historical average
of 7-8x) and P/E of ~5x (v/s average of ~13x). Free cash flow generation remains
strong, which allows COAL to distribute healthy dividends (avg. pay-out over FY15-20
in excess of 100%). Dividend yield for FY20/21 is now at ~10%.

However, Coal India serves the mission to supply coal at low prices to India’s power
sector, with little regard for profits, so conventional approach of multiple based
valuation is not appropriate for COAL as no particular emphasis on shareholder
wealth maximization and it should only be valued by Dividend Discount model. And
as dividend of Rs. 12 last year it transplants into >9% dividend yield . Though next
year cash flow will be under stress but as situation normalize from FY 22 Dividend
payout will increase and same will rerate the stock.

As it lacks near term as FY 21 profitability will be significantly impacted and so return

ratio will detoriate sharply so it should trade in the range of 120-150 in the near term
and 90-180 in the medium term. But with downside is limited due to dividend yield
and almost everything is discounted in the price coal India should be bought for a
longer term for a modest return in the from of Dividend and if prices are linked to
market then same can be rerated significantly.
Historical Prices:
Year Open High Low Close
2020 211.95 214.50 119.25 130.45
2019 241.00 270.90 177.80 211.40

2018 265.95 316.55 228.50 240.75

2017 303.00 332.10 234.00 263.00
2016 329.80 349.85 272.05 300.00
2015 384.00 447.25 300.75 328.70

2014 294.05 423.85 240.50 383.75

2013 355.50 372.10 238.35 290.00

2012 302.60 386.00 301.20 355.05

2011 316.30 422.30 288.95 300.85
2010 287.75 357.60 287.45 314.50

Moving Average (As on 22-07-2020)

20 Days 133.01 50 Days 134.40 200 Days 168.30

R1 150 R2 180 S1 120 S2 90

Recommendation of Other Analysts:

Date of Reco.
Name of Institute Reco. Target Price
Reco. Price
Motilal Oswal 29-06-20 Buy 135 189

ICICI Direct 29-06-20 Buy 135 150

SMC Global 30-06-20 - 134 -

Year Interim Final Total Year Interim Final Total

2020 12.00 - 12.00 2015 20.70 - 20.70
2019 5.85 - 5.85 2014 29.00 - 29.00
2018 23.75 - 23.75 2013 9.70 - 9.70
2017 19.90 - 19.90 2012 9.50 4.30 13.80
2016 27.40 - 27.40 2011 - 0.50 0.50
 Product Profile:
Coking Coal :
These coals, when heated in the absence of air, form coherent beads, free from volatiles, with
strong and porous mass, called coke.
 These have coking properties
 Mainly used in steel making and metallurgical industries
 Also used for hard coke manufacturing
Semi Coking Coal :
These coals, when heated in the absence of air, form coherent beads not strong enough to be
directly fed into the blast furnace. Such coals are blended with coking coal in adequate
proportion to make coke.
 These have comparatively less coking properties than coking coal
 Mainly used as blend-able coal in steel making, merchant coke manufacturing and other
metallurgical industries
Non-Coking Coal :
These are coals without coking properties.
 Mainly used as thermal grade coal for power generation
 Also used for cement, fertilizer, glass, ceramic, paper, chemical and brick manufacturing,
and for other heating purposes
Washed and Beneficiated Coal:
These coals have undergone the process of coal washing or coal beneficiation, resulting in
value addition of coal due to reduction in ash percentage.
 Used in manufacturing of hard coke for steel making
 Beneficiated and washed non-coking coal is used mainly for power generation
 Beneficiated non-coking coal is used by cement, sponge iron and other industrial plants
Middlings :
Middlings are by-products of the three stage coal washing / beneficiation process, as a fraction
of feed raw coal.
 Used for power generation
 Also used by domestic fuel plants, brick manufacturing units, cement plants, industrial
plants, etc.
Rejects :
Rejects are the products of coal beneficiation process after separation of cleans and / or
middlings, as a fraction of feed raw coal.
 Used for Fluidized Bed Combustion (FBC) Boilers for power generation, road repairs,
briquette (domestic fuel) making, land filling, etc.
Cil Coke / Ltc Coke :
CIL Coke / LTC Coke is a smokeless, environment friendly product of the Dankuni Coal
Complex, obtained through low temperature carbonisation.
 Used in furnaces and kilns of industrial units
 Also used as domestic fuel by halwais, hotels, etc.

Coal Fines / Coke Fines :

These are the screened fractions of feed raw coal and LTC coke / CIL Coke respectively,
obtained from the Dankuni Coal Complex and other coke oven plants.
 Used in industrial furnaces as well as for domestic purposes

Tar / Heavy Oil / Light Oil / Soft Pitch :

These are products from Dankuni Coal Complex using low temperature carbonisation of non-
coking coal in vertical retorts.
 Used in furnaces and boilers of industrial plants as well as power houses, oil, dye,
pharmaceutical industries, etc.
DISCLAIMERS

• We are not registered with SEBI as an Investment Adviser under SEBI (Investment
Advisers) Regulations, 2013

• This research report (“Report”) is for the educational purpose only and same
should not be reproduced or redistributed to any other person or in any form
without our prior permission. The information provided in the Report is from
publicly available data, which we believe, are reliable. While reasonable endeavors
have been made to present reliable data in the Report so far as it relates to current
and historical information, but we do not guarantee the accuracy or completeness
of the data in the Report. Accordingly, we shall not be in any way responsible for
any loss or damage that may arise to any person from any inadvertent error in the
information contained, views and opinions expressed in this publication.

• Past performance should not be taken as an indication or guarantee of future

performance, and no representation or warranty, express or implied, is made
regarding future performance. Information, opinions and estimates contained in
this report reflect a judgment of its original date of publication by us and are
subject to change without notice. The price, value of and income from any of the
securities or financial instruments mentioned in this report can fall as well as rise.
The value of securities and financial instruments is subject to exchange rate
fluctuation that may have a positive or adverse effect on the price or income of
such securities or financial instruments.

• The Report also includes analysis and views of our research team. The Report is
purely for information purposes and does not construe to be investment
recommendation/advice or an offer or solicitation of an offer to buy/sell any
securities. The opinions expressed in the Report are our current opinions as of the
date of the Report and may be subject to change from time to time without notice.
We do not accept any liability arising from the use of this document.

• Investors should not solely rely on the information contained in this Report and
must make investment decisions based on their own investment objectives,
judgment, risk profile and financial position. The recipients of this Report may
take professional advice before acting on this information.

• We collectively do not have any financial interests in the subject company, do not
own 1% or more of the equity securities of the subject company/ies mentioned in
the report as of the last day of the month preceding the publication of the research
report and do not have any other material conflict of interest at the time of
publication of the research report.