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Coal India (COAL)
N(V): Huge demand; will supply keep pace?
Power projects solely relying on COAL will require incremental
c150mt by FY17e; MoEF needs to expedite clearances
Our indepth analysis of current and new mines suggests
COAL will produce at least an incremental 127mt by FY17e
Remain Neutral (V) with target price of INR425; stock needs
fresh catalysts
MoEF needs to expedite clearances — demand-side pressure mounting. Our analysis
of demand from incremental power projects over FY12-17 (depending solely on COAL
supplies) suggests incremental demand for c150mt (from c347mt to over 500mt pa by
FY17). We believe the Ministry of Environment and Forests (MoEF) will need to expedite
clearances for this demand to be met.
Incremental coal production of c127mt possible by FY17e — c110mt will have to be
from new projects. We believe better utilisation of existing mines can add c20mt of
incremental supplies (specifically from Singrauli, Talcher and Central Coal fields), but a
large part of incremental supply will have to come from new projects. Our detailed
analysis of approved large projects for COAL (see pages 8-13) suggests that this is
possible (from mines under MCL, CCL and NCL) if clearances are expedited (most
mining projects are at some stage of environmental or forest clearance). The recent lifting
of the moratorium on projects in IB Valley and Singrauli coal fields is a case in point. We
however note that even if these capacities get commissioned on time, imports will still
increase to 330mt by FY17 (currently 93mt) as coal demand from power projects will
outstrip supplies. In addition, if the MMDR Bill gets implemented as reported in the
media, COAL would have to raise product prices 8-9% over three years to offset the costs.
We like the company, but the stock needs fresh catalysts. Given the strong price
movement since its IPO (up c60% while the Sensex is down 10%), we believe valuations
are stretched and the stock needs fresh catalysts — such as higher-than-expected price
rises in FY12, improved logistics, or a higher proportion of coal sold through e-auctions
— but given the lack of visibility, we have not factored these into our earnings estimates.
Maintain Neutral (V) rating and target price of INR425 based on a combination of
DCF and earnings-multiple-based valuation. At our target price, COAL would trade at
15x FY13e EPS (current PE of 15.5x) and 9.2x FY13e EV/EBITDA. Upside risks include
higher-than-expected price increases, sale of beneficiated and e-auction coal; downside
risk is lower-than-expected offtake due to logistics constraints.
Can supply increase?
Improved capacity utilisation at existing mines can add an additional
c20mt to COAL’s annual production in the next 3 years
Reviewing the progress on 263mt currently approved projects, we
expect an additional c110mt pa increase in production by FY17
COAL has a large commitment for supply, which puts additional
pressure on MoEF to clear its expansion projects
COAL can beat our production
estimate in the medium term
While we see COAL facing numerous challenges
in increasing production, we believe downside
risk to our estimate of COAL’s production is
limited while upside to our estimate is a strong
possibility. We have analysed the supply and
demand drivers for COAL and give three key
reasons for our conclusions:
1. Headroom for increase in production available
through better capacity utilisation
COAL has some headroom from its currently
operational mines. Our mine-level analysis suggests
that the company should be able to increase annual
production by 20mt in the next three years through
improved capacity utilisation. While some of the
mines are operating at higher than 100% capacity,
some of the other major mines at Singrauli, Talcher
and Central coal fields are operating below 90% of
their capacity. These mines, in our view, can be
operated at higher capacities to achieve higher
production by COAL.
2. Capacity expansion plans in place, to
contribute at least c110mt of production annually
by FY17e
COAL currently has 263mt of large size approved
projects along with capex approval of INR127bn.
However, some of these projects are stuck either
at the forest clearance or environmental clearance
stage or fall under the no-go areas. Since the
projects have incurred capex in excess of 20-25%,
we believe they will be operational by FY17.
Analysing the last update provided by the
Ministry of Coal (MOC) and the issues
surrounding the production increase, especially
related to no-go areas, we believe the bulk of the
increased production will come from the coal
fields of MCL, CCL and NCL. These currently
account for 191mt of expansion projects with a
capex plan of INR88bn, of which 24% was
incurred by December 2010. We expect these
expansion plans to contribute at least c110mt of
production annually by FY17. Exhibit 1 provides
a summary of capacity expansion by the major
subsidiaries of COAL.
3. Unprecedented demand to put pressure on
MoEF
COAL’s current commitment to the power sector is
347mt in FY12. If we consider its commitment for
supplies to the proposed power capacity in the 12th
Plan (even assuming 40% of the c130GW projects
materialise), this would mean additional demand for
150mt at current supply ratios. Note that this is
purely demand from domestic linkage-based power
plants dependent on COAL for supplies and
excludes demand from captive and imported coalbased
plants. Thus, in our view, demand pressure on
COAL is huge as we expect demand from the power
sector dependent on COAL for its supplies to exceed
500mt pa by FY17.
We expect issues related to clearances to get
resolved in the medium term as a significant
production increase by COAL is stuck due to these
issues and hence a production ramp up is likely.
Therefore, we are reasonably certain that COAL will
be able to increase its production from 431mt in
FY11 to 559mt in FY17 (unchanged).
Implementation of the 26%
sharing of net profits
On 8 July, the media reported that the Group of
Ministers (GoM) had approved the draft bill of the
Metals and Mining (Development and Regulation)
Act, (MMDRA) and that coal companies would be
required to share 26% of their net profits with people
affected by the dislocation (applicable to existing
mines as well). The Bill will reportedly go before
parliament during the monsoon session (after having
been approved by the Cabinet). We are yet to see the
final draft of the Bill as it is not in the public domain.
Nevertheless, we expect this to be a drawn-out
process as it has implications with respect to both a)
applicability and b) implementation.
However, in the scenario that this provision is as
“plain vanilla” as the media reports, COAL would
likely need to increase prices across products to
compensate for these levies. On our estimates,
COAL will have to increase product prices by c8-
9% over the next three years to offset the increase in
costs due to these payments (see Exhibit 2). We
assume that these royalty payments (like other
royalties) will be tax-deductible.
Maintain Neutral (V) rating
and target price of INR425
COAL is likely to benefit from a surge in coal
demand in India, but supply constraints and
logistical challenges limit volume growth. Given
the strong price movement since its IPO (up c60%
while the Sensex is down 10%), we believe
valuations are stretched and the stock needs fresh
catalysts – such as a higher-than expected price
rise in FY12, improved logistics or higher
proportion of coal sold through e-auctions – but
given the lack of visibility, we have not factored
these into our earnings estimates (see Exhibit 3).
We value COAL at INR425/share based on a
combination of DCF and earnings-multiple-based
valuation (see Exhibits 4-6A). At our target price,
COAL would trade at 15x FY13e EPS (current
15.5x FY12e EPS) and 9.2x FY13e EV/EBITDA.
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10
percentage points above and below the hurdle rate
for Indian stocks of 11%. COAL is classified as a
volatile stock in our research model, which
implies a Neutral band of 1-21%. We maintain
our Neutral (V) rating as the potential return of
9.1% falls in the Neutral band.
Key risks
Upside risks include higher-than-expected price
increases or sale of beneficiated and e-auction
coal. A downside risk to our view is lower-thanexpected
offtake due to logistics constraints.
Headroom for increase in
production through better
capacity utilisation
We expect COAL to increase its production by an
additional 20mt per annum by increasing
productivity at some of its underutilised mines. As
of March 2010, COAL operated 471 mines under
21 coal fields. Of those 21 coal fields, capacity
utilisation is more than 100% for the top-six coal
producing fields (namely Korba, IB Valley,
Wardha Valley, North Karnapura, Rajmahal and
East Bokaro) with little headroom for any further
increase in production. However, for the other six
larger fields, the average utilisation is only around
86%, leaving headroom for an increase in
production. Exhibit 7 has more details.
But is the increase in production
possible?
We understand that increasing production in
underground mines is relatively more difficult
than in opencast mines. Hence we look at the coal
fields that are largely opencast and can possibly
increase production. Our detailed analysis of the
various coal fields suggests that COAL could
increase production at two of the large coal fields,
namely Singrauli (10mt) and Talcher (10mt), due
to production coming largely from opencast
mines. Similarly, we could expect a possible
increase in production at Central India Coal Fields
(4mt), which is operating at 86%
Capacity expansion plans in
place, to contribute >c110mt of
production pa by FY17
We expect COAL to increase production by 127mt
over FY11-17, which is based on the assumption
that it will be able to develop most of its approved
projects it is currently pursuing (c110mt) and
increase productivity at its existing mines (c20mt).
Exhibits 11 and 12 have more details of our
production forecasts and the projects being pursued
by COAL.
What is the probability of COAL beating
our forecast?
Our mine-wise analysis of COAL’s capacity
expansion plans suggests that there is little chance of
supply being lower than our forecasts while fasterthan-
expected execution of its plans poses upside
risks to our forecasts.
COAL has approved 69 projects in the 11th Plan
until August 2010, aggregating to incremental
capacity of 240mt pa by FY17. For this, COAL
expects to incur capex of INR128bn, of which it had
incurred about INR21bn (16% of total) till August
2010, indicating decent progress at these projects.
Exhibit 13 has more details.
We have analysed the status of 30 such large
projects with incremental capacity of more than
2.5mt (total 199mt) and also large projects approved
prior to FY08 (total 64mt), so overall for 263mt. As
per the MOC, most of the projects are on schedule
and are likely to be implemented over FY13-17.
Exhibit 19 has more details.
COAL had earlier envisaged incremental production
of c80mt at the end of FY12 in the 11th Plan,
however delays due to environmental clearances,
forest clearances and land issues not fully in the
company’s control have led to lower-than-expected
capacity expansion. Also the classification of ‘go’
and ‘no-go’ areas as well as Comprehensive
Environmental Pollution Index (CEPI) have made
matters worse and limited growth.
Majority of expansion by MCL and
CCL
We note that the majority of the expansion is by
MCL (115mt), CCL (51mt), SECL (45mt) and
NCL (25mt). Exhibit 14 has details of capacity
expansion in various coal fields taken up by
subsidiaries of COAL. We provide the status of
each of the mines under these companies in detail
in the following pages.
Mahanadi Coal Fields (115mt)
MCL operates its mines in two large fields
namely IB Valley and Talcher in Orissa. Exhibit
15 provides details of the current status at some of
its mines.
Central Coal Fields (51mt)
CCL operates its mines in six large coal fields in
the state of Jharkhand. Exhibit 16 provides details
of the current status at some of its mines.
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