Coal India is the largest coal producer in the world with reserves of around 18,862 million tonne. Add to that measured resources, indicated resources and inferred resources, and Coal India's total resources jump many times to over 64,218 million tonne. CIL has 17 coal beneficiation facilities consisting five non-coking and 12 coking beneficiation facilities with designed feedstock capacity being 17.22 MMT and 22.18 MMT respectively.
Strengths
Coal India's proven resources are the largest of any coal mining company in the world. Further, the company has scale and reach, which accounts for over 81 per cent of the country's total annual coal production. CIL single-handedly caters to demand for coal from over 76 per cent of the country's thermal power generating capacity. Spread over 8 states of the country are 81 mining areas in which the company operates 470 coal mines.
CIL's biggest strength is its pricing power, which comes from its low cost of production. Take Indonesian Ecocoal for instance. Coal India's comparable G11 grade coal is cheaper than this Indonesian competition by as much as 65-70 per cent. The significant price differential enables CIL to undertake price hikes when it needs, something that it has done twice since its IPO in 2010.
The company has plans to expand and has targeted to increase production from 452.2 million tonne in 2013 to 530 million tonne by FY15 and 570 million tonne by FY16. It has identified 126 new projects with an estimated capacity of 438.04 million tonnes (MT) to be taken up during the 12th Plan period. It has also plans to develop coal blocks acquired in Mozambique and comfortably sits on a whopping `60,000 crore cash, which is one-third its market cap.
The much needed and inevitable power sector reforms to ensure the survival of power distribution companies and State Electricity Boards will benefit Coal India. As Coal India alone meets over 76 per cent of the country's power generating capacity, any increase in price of coal will benefit the company directly.
Concerns
Lack of requisite infrastructure is Coal India's primary weakness. For instance, implementation delays in three key railway lines have stranded about 200 million tonne coal with no evacuation facilities. Though Coal India has targeted a 7.6 per cent volume growth, the target appears difficult given that recent growth has reduced from 4.5 per cent in FY09-10 to around 3 per cent in FY13.
Coal India has been mandated to sign fuel supply agreement (FSAs) with power plants that are expected to be commissioned by March 2015. Up until June 2013, Coal India had signed FSAs for a total quantity of around 131 million tonne per annum. With incremental production not catching up fast, that means the major part of the company's incremental production would go towards feeding power plants at a pre-determined price, leaving little for it to auction-a more profitable avenue. Realisations for e-auction for instance, in the latest quarter, stood at `2,220 per tonne compared to the FSA realisation of `1,262 per tonne.
The recent `1,773 crore fine imposed by the Competition Commission of India (CCI) on CIL for misusing its position as monopoly supplier is a matter of grave concern. Any such fines in the future will impact the operating profits, and raise a flag.
Valuation
Coal India trades at 11 times its earnings. The company has to overcome various infrastructure bottlenecks before production can leap forward. This is an investment candidate for those that do not like excessive risk, those that would enjoy an attractive dividend yield of 4.8 per cent and those that find comfort in the company's excessive cash hoard.
This article was originally published on February 20, 2014.
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