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.
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