Can Coal India withstand competition from 100% FDI

Recently Government has allowed 100% FDI is coal mining. Since the announcement, talks started how coal India will now not be able to sustain the competition and this can be beginning for the end. In this article, we try to understand how it can impact India largest coal miner and whether it makes sense to invest in coal India at current price.

First understand, India coal situation. India produced 730mt of coal in FY19, of which 607mt production was from our national behemoth. Most of the coal production goes to meet demand for merchant power generator, industries like cement and steel sector. India needed 950mt of coal in FY19, so balance 234mt was imported mostly from SE Asian nation and Australia.

Demand Growth India demand for coal is increasing by 5-6% every year, so is the production of coal, hence it can be assumed that coal India was not in position to replace the imported coal. Company is promising for long that we will reduce India's import dependence, but regularly fall behind on meeting the target.

Terms with Buyers Coal India commitment to power generator and industrialist are for long term purchase contract, so one should assume that existing customer of the company will not move committed purchase. They may go for their incremental need which anyway was met from imported coal. Coal India mines are leased for very long term, hence their is no threat on maintaining the production at current 5-6% growth rate. New bidder will target, mine which is not allocated yet or going for renewal. First one need to look at the unallocated mine within the country and mine going for renewal from coal India kitty.

Replaceable Demand: Now, out of 230mt of coal imported, one should assume 100mt requirement is high gross calorific value coal which is unavailable in India. Plus few of the plans are located near port, which is uneconomical to serviced from road /rail network in India. So, half of currently imported coal will continue to be service through import for reason above.

This leaves 100-125mt of coal in current environment which attract the new investment. If that production come, it will be good for India balance of payment and coal India will be largely unaffected. Though this is big size, global mines and investors are moving away from dirty fuel. Miners are not making investment in coal, few investors don't invest in  companies which burn coal disproportionately, Scandinavian countries. Indian govt,as well, want to push renewal energy, most of new capex in power generation has come in renewal sector.

Opportunities for Coal India: Now lets see what coal India can do to become efficient miner. Coal India, faced with incoming competition should take bold decision to aggressively ramp up production and make opportunity size for foreign player from 100mt to even lower. Reduce employee count, coal India employee cost will be 35% of revenue, one of the highest in world. Here, union hold the sway, if coal India ask employee to increase production by 1mt, union will say will need xx more worker, this increase burden of cost and leave limited scope for mechanisation.

Coal India should do something on washeries side, it is very sorry state of affairs. When company came with ipo since then we are thinking washeries will be set up, still washed coal is not even 3%of total production. Washeries, if installed near coal plant, will improve GCV, reduce wastage to travel from mine to steel /power plant and hence reduce cost of transportation.

This can be wishlist, but within PSU good thing is wishlist remain the list and one doesn't have to keep updating it, we can say this should not be in base case to expect improvement from here in future, so question is should one invest in Coal India.

Valuation: Coal India is currently valued at 3x EV/EBITDA and 8% dividend yield. Cash balance is 30% of mcap hence looks like decent investment. Company has given guidance of 660mt production, 9% growth if they are able to achieve even 640mt, valuation will start looking even better.

Risk: Biggest risk is promoter itself. Continuous overhang on stock due to govt divestment. Plus current NDA govt has found innovative way to take money from PSU. Asked ONGC to buy HPCL, hence they take the money and retain the control as well. Minority shareholder of both the companies will be screwed. Government currently is hungry and need fund. Can Govt do similar thing in Coal India, ask the company to buy SAIL or RINL.

Possibility of risk materialising is low: when HPCL was sold, govt stake was 51% in it they can't take much money from HPCL directly and hence use it to take ONGC cash. Here, Govt. hold 70% in Coal India, so if 25000cr dividend is declared govt. will get 70% plus 20% as DDT. In total, they get 22500cr out of 30000cr, 75%. In HPCL leakage was fairly high.

Disc: No investment, doesn't like investment in PSU Co. Money earned by slogging 12hrs shouldn't chase company run by last people.

Changing Trend among Indian Television Audience

There has been huge change in last two decade in the way we use to watch television. It use to be family entertainment and important source of information which is getting heavily disrupted in the modern digital world. I am interested in understanding given the current context, how this industry will shape up in future, what will be the future of key listed players like Dish TV, Zee Entertainment and Sun TV.

Reason for shift from family entertainment to personal choice: There is no denying the fact that entrainment has become more personal. Back in 90s entire family use to watch tv together and now it has shifted to individual staring at small personal screen. Definitely, rise of individualism lead to such shift but also increase in choice of content is important factor.

Back in 90s, there was only one particular show on prime time, hence entire family watch that only thing available on TV. Fast forward that in 2000s, there was one important show at particular time, KBC slot fix for 9PM and Mr. Bachchan would say "9 baj gaye kya" in star commercial reflecting family watching that one thing together. Now, there is plethora of content to please every mood, personality and hence variety of choice means individual with different personality /age group will prefer different content. Hence, era of watching TV together is getting over and this trend is unlikely to get reversed.

Advertisements model on television getting disrupting : Television was great medium for new brands to advertise and create awareness among consumer about new launches. Some products plainly use to show inherent qualities while other use to position their brands as aspirational and create latent demand for their products. The premium brands will showcase consumer in 4 wheeler while the affordable brands will try to make appeal to consumer on 2 wheeler.

Both are again getting disrupted due to digitization. You get to know about product at the click of the button, not only you get to know what companies are claiming about performance but feedback from the real users. Companies also have many avenues to disseminate information about their products. Social media advertising is on the rise. Even to position their products companies use multiple platform and hence the share of television is on decline. However since the overall pot of total advertising revenue from the companies have increased multi-fold, this is not that big negative.

Advertising eyeballs reducing significantly: This is non reversing trend, content watching on television is shifting from traditional cable and DTH to digital. Rise of Amazon prime, Netflix has bring in plethora of good content to television watchers. Consumer doesn't to go through advertisement when they are watching television, this will hurt broadcaster as they draw revenue from two source, subscription from consumer and advertising.

With so much usage of mobile phone, people attention span is reducing dramatically. No one wants to wait for content to upload or buffering, few seconds of advertisement on YouTube is irritating. In such scenario, advertising revenue which accrue from television is on limited oxygen and soon will be history. What may happen is telecom companies and every app on mobile phone track every activity of users and that data is sold to marketeers who can do targeted marketing, like I receive ad on stock market while browsing on Internet.

Content created on bulk getting limited  viewership: A decade back, family soap opera were being watched by almost all age group within the family. Ekta Kapoor was household name, cut across age group.

One broadcaster loosely said once, hum jhola bhar ke content banate hai, 30min episode created everyday which is consumed by Indian audience, the amazon prime and Netflix of the world can't make that much content to satiate Indian audience appetite. This trend is again shifting, though significant people still watch daily dose of opera, but the underlying shift can't go unnoticed. A decade back there was just few national broadcaster, who claimed ownership of Indian audience, now there is so many content provider from Indian and overseas producers, earlier model is definitely is disrupted. It is like earlier youngster were watching only one sports in India, now apart from cricket, people have developed interest in football, tennis even badminton and TT is gaining traction. This shows preference of new audience is more diverse than before or already they are served more granular than earlier.

All this points to a direction that tradition medium of entertainment has to evolve our may slowly move towards extinction.

Gold Glitter Never Fade | Gold Loan Companies: Business model, Strategy and Valuation

Gold Loan business is very old in India, person holding gold use to pledge it for loan for emergency or business purposes.

Gold Loan Market in India: In India, there is about 25000 tonnes of gold, of which 80% is held by temples, household as jewellery and banks reserve. Remaining 20% of the gold, about 5000tonnes is only used as collateral for loan. Of this, 5000tonne, about 80% Gold Loan business is done by local money lender & pawnbroker, which is unorganized lending, only 1000tones gold loan business is done by NBFC and Banks.

Generally gold loan is regarded as emergency or need based loan and their customer base is semi-urban and rural areas. These customers are generally not catered by the regular banking channels and their financing needs are mostly met through unorganized segment. South Indian market, is well penetrated for Gold Loan, somehow the trend of gold financing is more prevalent in South compared to North India. Kerala leads in the business of Gold loan, India’s leading player, Muthoot finance, Manappuram are headquartered in Kerala. Even one of India’s oldest private bank, South Indian Bank, which has large amount of Gold loan book is based there.

Unorganized vs Organized: The unorganized sector lending is done at very high interest rate 30-40%, sometimes at even 50%. These money lenders are not under any regulation from RBI and can do business as they feel like. In comparison to them, Gold finance NBFC use to lend at 20-25% interest rate.

The business of organized gold financing is growing steadily in India for past many years. As organized player indulge into fair practice with borrower, customers from unorganized sector will gradually shift towards organized segment. Since the customer size remain very large in the unorganized segment as we discussed earlier almost 80% is unorganized, this shift will continue gradually for many years to come. Hence, the business for most of the gold finance companies should continue to increase, although slowly.

Operational Parameters Let’s touch upon some operating parameters one should look. Loan per branch, loan per employees or loan officers and loan per customers are three important metrics. When loan per branch is steadily increasing, it means company with similar number of branches and cost structure is doing more business and hence should be earning higher profit. Now a days, company doesn’t need as extensive branch network with the use of technology, company can do larger business from same number of branches, hence we should also look at loan per employee. Another metrics to look at is Loan per customer, since this is small ticket size loan, it should be seen that loan per customer shouldn’t grow beyond nominal GDP growth in India. Faster growth here, should raise a concern that loan are given to customer with higher risk profile.

Key Financial Parameters As next step, we will look at each of the item that’s makes into Profit and Loss account.

Suppose, with every gram of gold, whose price is about Rs 3200 in India, companies can lend some amount to borrower. RBI has set that limit upto 75% of the value of gold. This 75% limit is called Loan to Value (LTV in NBFC companies).

The interest rate at which loan is given is called Yield. Interest rate ranges in the range of 20-25%. In this segment, Muthoot charges lower interest rate compared to Manappuram as the size of the loan at Muthoot is bigger and hence lower interest rate are offered to attract big ticket loan.

2^nd item is Interest cost: This is the interest rate at which gold finance companies borrow from the market. Generally, they borrow from banks, capital market and mutual funds by way of debentures and commercial papers to meet their near term liabilities. Currently, borrowing rate for two large companies lies broadly in the range of 9.0 – 9.5%

So, it looks like these companies makes a very large spread because they are borrowing at 9 – 9.5% and lending at 20-25%. While if you compare the same with banks, they would be earning much lesser spread.

Operationally Heavy Business: There is reason for such large spread in Gold finance companies. Gold financing is very operational heavy business with low ticket size and quick churning of loan. Gold are kept at the same branch where customer deposit their gold, huge operational cost is incurred for doing the business. The loan per customer is very small, average ticket size will be 30000 – 50000, hence it takes high cost for acquisition and managing customers. Both the companies have over 3000 – 4000 branches to conduct the business. So, the opex ratio for gold finance companies is high at 7-8%, which means 7-8cr is spend on operations for loan book of 100cr. with more technologies usage and lesser requirement of cash at every branches due to online disbursement of loan opex ratio will gradually come down. Primarily, there is three item taken as cost in operations of the company. Employee cost, Deprecation and other operating expenses at the branch level.

Once, cost is deducted, we arrive at Pre provision operating profit, also known as PPOP. As we all know, in lending business, there is always a chance that customer will not return money on time. Hence, company has to provide provision for anticipated loss on loan amount. This is widely known as credit cost in NBFC. Generally, in gold finance companies credit cost is very small as gold is very liquid and easily saleable assets. In case, money is not returned on time, lender can sell gold in market and recover their loan amount. After deducting credit cost we arrive at PBT.

Return on Assets, RoA is defined as how much Profit generated in a year over Loan book. RoA is generally high in gold finance companies, somewhere in the range of 4 – 5%. With leverage of 4 – 5x, Companies can take the return on equity easily above 20%, which is very good for any kind of companies in India.

Risk Next, let’s look at the risk which gold finance companies faces, and how they are equipped to deal with those risk.

1. First risk could be from banks. As we saw, gold financing is secured lending and companies are making high spread. It can attract banks to enter aggressively in this space. But banks are not focused on Gold finance, Banks are mostly focused on larger ticket size loan.

2. Rural distress: If Indian rural economy slows down there will be lesser economic activity in the country side and hence less demand for fund.

3. Farm loan waiver: Whenever, we will see distress in rural economy, politician will bring farm loan or rural loan waiver into discussion. This not only increases the credit cost we discussed in P&L, it also distort the credit culture in the country.

4. Price reduction in Gold. Since, gold is the collateral for loan, if gold price comes down, lower amount of loan will be given for the same quantity of gold.

Valuation: Lets spent sometime on valuation. RoE, we calculated in P&L is very important in finding out the fair value for the company. Suppose there is govt securities G-Sec, which gives us yield of 8%. So, we pay pari-pasu for investment or Rs. 100 in G-Sec securities and we take 8% as our base rate of risk free return. Gold Finance companies can generate 20% RoE, which is about 2.5x of risk free interest rate. If we were valuing govt securities at pari-pasu, we can value gold finance companies at 2.5x of net worth or book value. This is only one metrics, to value NBFC, but other than RoE one has to look growth potential in the long term, future risk and competition to see if valuation should be done at higher or lower than 2.5x.