JPMorgan: Key takeaways from the Coal India analyst meet

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We attended the Coal India Limited analyst meet. The company
announced its plans to increase coal production from 431MMT in FY10 to
647MMT by FY17 implying a CAGR of 6%. Mgmt. estimates demand for
coal to grow by 10% annually on the back of capacity expansion in the
power sector, indicating that the demand/supply gap will persist.
• Demand/supply gap to persist for the power sector. CIL indicated that
they will increase supply to the power sector from 331MMT in FY10
(~89% of total coal consumed by power utilities, supported ~74GW

capacity@ 4.5MMTPA consumption per GW) to ~360MMT in FY12 and
by 20MPTA thereafter. This would imply 460MMT of supply to power
sector in FY17 and possibly an additional 10% via e-auction. CIL admitted
that LoA awards for coal supply have been liberal and there would be a
supply shortfall if power capacities are commissioned as per projections.
• Use of washed coal from CIL may increase cost of generation. Mgmt.
aims to increase the production of washed coal from 15MMT (3.5% of
production) to 300MMT (46% of production) by FY17. Washed coal will be
priced at $40/ton a premium to the current CIL price of ~US$20/ton.
Benefits of washing include: 1) 15% increase in calorific value, implying a
reduction in consumption 2) 15% reduction in transportation costs 3) lower
ash handing costs and 4) improved boiler efficiency.
• Who will use washed coal? In our view, IPPs would be more receptive to
washed coal if it needs to be transported over long distances and/or the PPA
allows for fuel cost pass thru - for e.g. regulated utilities like NTPC. Adani
Power and Lanco both have 23% of their respective planned capacities
dependant on linkage coal without a pass thru in tariff. In our view both will
be reluctant to use washed coal in case the quality adjusted price differential
is not favorable.
• Mine status. Of the 471 mines operated by CIL, 60% of the mines are
making losses but contribute to 8% of the production in FY10. These mines
are being phased out gradually. Moreover mgmt. said that the claim that
48% of the mine area is in the ‘no go’ zone has been withdrawn and is
currently being discussed again with the MoEF, a positive for the sector.
• Adani Power (OW) and Lanco Infratech (OW) are our top picks in the
sector. Our preference indicates our relative comfort on execution, state of
land acquisition, clearances, funding, fuel and valuations within the sector.