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REGISTER NOW OR LOGINSurprised by the statement? It feels unreal that we would be thinking of selling shares of the largest public sector coal company in India, which is the world’s third-largest coal producer. Coal India Ltd (NSE:COALINDIA) operates through 82 mining areas spread over 8 provincial states. It owns seven coal producing subsidiaries and one planning and consultancy company in India. It is the single largest producer of coal in India, accounting for more than 80% of the country’s overall coal production and commanding nearly 74% of the Indian coal market share. However, the future of coal is bleak globally. India itself has no plans of expanding its coal-fired generation till 2027 and construction of new coal fired plants has stopped. It already has more than 50 GW of coal plants under various stages of construction at present many of which face a bleak future. Thermal power plants are facing heightened pressures with renewable energy prices falling at a steep rate. As such, Coal India is destined to face a tough time going forward.
Coal India Challenges
i) Increasing Renewable Energy focus – India accounted for more than 7% of total global emissions in 2015. India was the fourth largest emitter globally. Coal accounts for 60% of the country’s total generation capacity. But the share of renewable energy generation is rapidly increasing in the pie. The country has been working on reducing emissions by moving towards clean and green sources like solar and wind energy. Tariffs for renewables in India, especially solar, have fallen by more than 70% in the recent 5-6 years. The country has aggressive plans to increase renewable energy installations to 175 GW by 2022. In contrast, thermal power generation is estimated to grow by less than 4% in FY17-18, according to Central Electricity Authority (CEA).
ii) Low Quality of Coal Reserves and old Mining Practices – Indian coal is of typically low content with high amounts of impurities making it unsuitable for industries like steel industry where higher quality is a must. The low calorific content of coal makes Coal India’s coal of lower value leading to lower realizations. Moreover, Coal India is not a well-run modern mining company. Its mining operations are hardly efficient and its expertise in underground mining, as opposed to open casting mining, is quite suspect.
iii) Pilferage and Corruption - India’s coal mining policy is a huge mess with Coal India being highly inefficient and ridden with corruption. Though Coal India has a monopoly over mining of coal in India, it is one of the most inefficient and corrupt enterprises. There have been reports of millions of tons of coal been stolen in the past and the company is over bloated in terms of manpower. It has an awful cost structure with a lack of mechanization, resulting in massive manpower costs. In fact, HR costs account for an unreasonable amount of total costs. Its employees benefit cost stood at INR 9,229 crore during the latest quarter, sharply higher from INR 7,843 crore in the previous year. With little competition, the company has no incentive to increase production or improve efficiency.
iv) Climate Concerns – Coal plants as young as 20-30 years need to be retired to control the global temperature rise to 1.5 C. The 2015 Paris agreement of global leaders on climate change entails a modernization of power plants to curb emissions. India which is a signatory to this agreement houses some of the most out-dated thermal power plants which are emitting harmful gases into the air. These coal fired plants need to focus on improving their efficiencies, stick to the disciplined usage of water and bring down the emissions within the acceptable limit, otherwise, they might face stringent actions even closures. On the other hand, investing in renewables brings environmental benefits like reduced pollution.
v) Deteriorating Financials - All these factors have adversely affected the company’s earnings and dividends as can be seen below. The company posted dismal results in the most recent quarter ending March. Operating profit was 38% lower y/y owing to high salary provisions to the tune of INR 2,100 crore.
Source: FT.com
Coal India Upside
a) Increased Investment and Time for Renewable Energy to Mature in India - India would need necessary funds and time to get completely off-grid. Moreover, the country will still need to attain the comfort level to manage the uncertainty associated with renewable energy generation. India would also need to invest in smart grid systems, transmission network, storage options and demand-side flexibility to manage the intermittency and variability in renewables.
b) Coal India is Diversifying – Though coal is expected to decline in India’s total energy mix, it will remain significant for at least a decade. With implications of Climate Change convention and increased pressure on coal’s demand and prices, Coal India is also thinking of diversifying into other ventures including renewable, mining, metals and minerals. It has also made plans for setting up 10 GW of solar generation facilities. Its ‘Vision 2030 for the coal sector’ will envisage a reduction of carbon footprint and abatement of global warming. The company is also considering splitting into seven smaller units to run more efficiently.
Valuation
The current stock price reflects weakness in coal prices and the company's restrained performance. Coal India shares have lost almost 30% in the last one year, currently trading near the INR 250 mark. The company has a market capitalization value of INR 156,054 crores and is trading at 16.8 times its forward earnings. The stock valuation has become attractive due to a high dividend yield a. However, investors with a long term outlook should look for other options in my view.
Conclusion
India has still some hope for the dirty source of power. The country is looking at increasing local production of coal for substituting imported coal. Analysts expect more than 10% volume growth over the next two years, once the new coal linkage policy `Shakti' is implemented.
However, renewable sources of energy provide energy security, energy accessibility and energy sustainability to the country. There would be no need to commission any new coal-fired power stations until at least 2027 in India. The Indian economy could be coal-free by 2050 if the prices of renewables continue falling at the existing pace. I, therefore, foresee hard times for Coal India in future and would advise long term investors to be wary of this stock.
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