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EQUITY RESEARCH: COAL INDIA
Coal India Limited (CIL) – incorporated in 1975 post the government took over private coal mines, had production of 79MT at the time of inception. Today, CIL is the largest coal producer in the world. Its raw coal production in FY22 stood at 623MT, up 4.4% YoY. On Oct’10, the GOI divested a 10% stake in CIL for Rs 15,200 Cr through an IPO and got listed on the stock exchanges. After the IPO, the GOI has reduced its stake through an offer for sale, by way of placement of shares in the Central Public Sector Exchange Traded Fund, and buyback of shares through an offer for sale. As of Mar’22, the government stake stands at 66%.
- With coal commanding such prominence in the Indian energy sector, Coal India Limited leads the country’s coal production contributing to around 80% of the Nation’s entire coal output. CIL company is committed to increase its production and supplies to the mandated levels to ensure the country gets power at just price.
- In a country where 69.9% of the total electricity generation is coal based, CIL virtually empowers the nation’s power sector. CIL’s supplies to power sector exceed 80% of its entire despatch.
- CIL is also one of the largest contributors to the government ex-chequer – both Central and State – and also plays a crucial role in country’s social fabric touching the lives of the countrymen in more ways than one under its corporate social responsibility umbrella.
- CIL has eight fully owned Indian subsidiary companies: CIL is the holding company and has 8 Indian subsidiaries viz. Eastern Coalfields ltd (ECL); Bharat Coking Coal ltd (BCCL); Central Coalfields ltd (CCL); Western Coalfields ltd (WCL); South Eastern Coalfields ltd (SECL); Northern Coalfields ltd (NCL); Mahanadi Coalfields ltd (MCL), and Central Mine Planning & Design Institute Limited (CMPDIL). In addition, CIL has a foreign subsidiary in Mozambique, namely Coal India Africana ltd (CIAL). CIL has incorporated two new subsidiaries – CIL Navikarniya Urja Limited for the development of nonconventional/clean & renewable energy and CIL Solar PV Limited for the development of solar photovoltaic modules.
- During 2021-22, total volume of coal and overburden handled by CIL was about 1733 M. Cum. The overall system capacity utilisation of CIL thus worked out to be about 77.10 %.
- CIL has achieved PBT of 23,616.28 Crores during the year registering a robust 31.13% growth compared to 18,009.24 Crore PBT of FY’21.
- PAT-the second highest so far, at 17,378.42 Crores posted a strong growth of 36.81% over PAT of 12,702.17 Crores earned in FY’21. During Q3 and Q4 Coal India recovered much of the ground in its PAT from a growth compression of 1% in Q2. Third quarter’s PAT registered a sturdy 47.75% growth compared to same quarter of FY’21, while the fourth quarter witnessed 45.91% growth.
- CIL achieved its highest ever Gross Sales of 1,52,667.14 Crores and Net Sales of 1,00,623.37 Crores. While the growth in gross sales over previous financial year is 20.41%, the growth in net sales rose sharply to 21.66%.
- CIL produced 622.63 million tonnes of coal during FY22 which is the highest ever since CIL came into being. Production for the year represents an increase of 26.41 MTs which is 4.4 % growth over last year’s 596.22 MTs. Total coal despatch during the year reflected 15.2% growth over FY’21 when the off-take was 574.48 MTs.
- SUBSIDIARIES: Five of CIL’s subsidiary companies have surpassed the production of FY’ 21 registering growth. They are BCCL (23.75%), CCL (10%) NCL (6.42%), WCL (14.78%) and MCL (13.62%). During the financial year, MCL became the second CIL subsidiary to join the exclusive club of 150 MT coal producing companies. MCL was the top performer with a production of 168.17 MTs achieving 103 % of the target.
- BCCL, NCL and MCL have surged ahead of their respective production targets of FY’22 with achievement of 102%, 103% and 103% respectively.
- Supplies to Power Sector: CIL’s supplies to this sector registered a record high of 540.57 MTs. CIL supplied 95.60 MTs more coal to power sector during the year compared to FY’21. This increase in volume terms during the year was higher than the combined increase of 90.35 MTs achieved during the previous seven year period (2013-14 to 2020-21).
- Aluminum project: CIL Board has approved venturing into the Aluminum business vertical through a Brownfield Project (as a JV between MCL and NALCO) and a Greenfield Project. The company has received approvals from the Odisha government and has asked it to allot bauxite mines on a nomination basis. Capex on the project is expected to be Rs 26,000 Cr (including powerhouse) which will be funded through debt.
- Fertilizer plants: The Company has two fertilizer projects viz: HURL (Hindustan Urvarak and Rasayan Limited) and TFL (Talcher Fertilizers Limited). HURL Capex is Rs 16,000 Cr (CIL’s share is 33%, translating to Rs 1,300 Cr equity). TFL Capex is Rs 13,000 Cr (CIL’s investment will be Rs 1,300 Cr).
- CIL incurred capital expenditure of 15,400.96 crores in 2021-22 which was the highest ever, registering 15.94% growth compared to the capex of 13,283.83 Crores of FY’21. What makes the growth all the more significant is that it comes on the back of a strong base. Because, CIL’s capex during FY’21 more than doubled over the preceding fiscal’s 6,270 crores.
- FY’22 capex achieved 104.88% of the target of 14,685 Crores. The accomplishment comes at a time when Govt. of India had advised CPSEs of the country to scale up their expenditure to boost the economy. For the second year in succession, capital expenditure shot over the target which is yet another record of its own.
- The capital expenditure, fully funded through internal resources, was driven up by many developments of the company like accelerated HEMM procurement process, land acquisition, coal evacuation initiatives, rail infrastructure strengthening, timely contract finalizations and execution, joint ventures etc.
- The year’s record capex will yield positive results to the company in ensuing years in terms of production and coal transportation.
- Projects Completed during the year 2021-22: 5 coal projects with a sanctioned capacity of 12.60 MTY and sanctioned capital of ` 1769.41 Crores were completed with a total completion capital of ` 1727.66 Crs. during the year 2021-22.
- Status of Ongoing Projects (Costing Rs 20 Crores & above): 117 coal projects with a sanctioned capacity of 918.86 MTY and a sanctioned capital of ` 132633.96 Crores are in different stages of implementation out of which 75 Projects are on schedule and 42 Projects are delayed. The major reasons for delay in implementation of these projects are delay in FC, possession of land and issues related to R&R.
Key Risk & Mitigation
- Low power demand: Weakness in power demand could lead to a lower off-take of coal affecting the company’s profitability.
- Fall in international coal prices: A fall in international coal prices could impact the e-auction premiums and can also reduce the volume off-take if import prices become more attractive than domestic prices.
- Input cost inflation and wage hike: Wage hike is due for CIL, higher wage hike and input cost inflation (Diesel prices) could put pressure on margins. If the FSA price hike is not carried out in tandem with the wage hike then profitability will get impacted. Management is confident of taking the price hike to mitigate the impact of input cost inflation.
- Delay in infrastructure and evacuation projects: The company is investing large Capex in Rail infrastructure and evacuation facilities. Delay in the construction of these facilities, Capex overshoot and the external threats from a security perspective to such infrastructure set-up can adversely affect the return on Capex for the company and its future expansion plans.
CIL physical performance during 2021-22 has scaled to all-time high creating multiple records in production, off-take, despatches to power sector and over burden removal (OBR). Higher international coal prices and volume growth in Coal India augurs well for the improvement in the profitability for CIL. Turning out a strong financial performance as well, Gross Sales, Net Sales and Capital Expenditure have been the highest ever in 2021- 22. Profit After Tax has been the second highest during the year since the inception of the company. CIL’s coal production grew by 4% YoY in FY22 to 623 million tonnes (MT), while dispatch rose by 15% YoY to 662 MT. The said growth was driven by the robust power demand (Apr-May’22 coal production was up 29% YoY at 108.2 MT and dispatch stood up 9% YoY at 118.7MT). The company has a production and dispatch target of 700 MT for FY23, which is another driver of long term growth. We believe that healthy volume growth will drive CIL profit in the future (FY23). We assign "Buy" position with a target price of 250.