Rising domestic demand, higher volumes augur well for Coal India stock

India is seeing all-time high peak power and energy demand growth (21 per cent, 15 per cent YoY in Aug'23) and seeing increasing shortage during non-solar hours

Demand for coal is likely to rise as the economy revives. There’s increasing energy demand due to higher economic activity and demand for industrial metals is also rising.

Demand for steel has also pushed the demand for coal, both as a raw material and energy, which is also a key input for the production of other industrial metals.

Cement manufacture is also energy-intensive and requires specific classes of coal. Globally as well, coal prices have firmed up.

India has seen all-time high peak power and energy demand growth (21 per cent and 15 per cent year-on-year or Y-o-Y in August) and increasing shortage during non-solar hours.

A sub-par monsoon also leads to lower hydropower production and wind generation has also been low.

This should be a driver for Coal India (CIL), and companies like Neyveli Lignite Corporation (NLC), which produces thermal power from captive lignite and coal. Steel and cement companies, which have their own captive sources of power and captive coal mines, will also hold a significant edge in terms of costs.

CIL could push production to 781 million tonnes per annum (MTPA), 859 MTPA and 936 MTPA during FY24, FY25 and FY26, respectively.

In addition to volume growth, international prices of thermal coal are gradually picking up.

This is partly due to fears of a gas crisis in Australia, declining stock at India’s power plants and Germany looking at coal to replace Russian gas imports.

While international coal prices are still lower than a year ago, the trend could lead to prices crossing the 2022 levels by late Q3 or in Q4 of FY24. This means CIL has great margins in whatever surplus coal it can produce over and above what it must supply at agreed prices on fuel-supply agreements.

The thermal capacity in India stands at 206 Gw and another 26.7 Gw is under construction, and expected to be totally commissioned by FY26. In addition, India is looking at thermal projects further down the road, which is expected to be commissioned progressively by FY32.

In 2021, Coal India introduced a new contract mining model ‘Mine Developer and Operator’ (MDO) where a private company is appointed to develop and operate a coal mine and identified 25 mines for this model. CIL has issued work orders for nine projects (127 MT annual production capacity) out of the identified 15 MDO projects (170 MT capacity) during FY23. CIL has identified another 37 closed or abandoned mines as potential for this model.

NLC is an integrated power company with captive lignite and coal mines. It has a generation capacity of 6,061 Mw. It operates four open cast lignite mines with a capacity of 30.6 MTPA and an open cast coal mine with a capacity of 20 MTPA.

NLC has lignite thermal generation capacity of 3,640 Mw, with four pithead power plants at Neyveli, Tamil Nadu, one pithead plant at Barsingsar, Rajasthan, and a 1,000 Mw coal plant through JV (NTPL) in Tamil Nadu.

NLC works on a cost-plus basis with tariffs determined by CERC and lignite transfer price determined by ministry of coal guidelines. NLC also has solar energy capacity of 1,370 Mw and wind energy capacity of 51 Mw.

NLC saw its all-time high generation of 30.08 billion units of electricity in FY23. It should exceed this in FY24.

NLC has a regulated business model, planned capacity addition and limited downside risk. Analysts agree that FY24 will see revenue and profit after tax growth. NLC is set to add 1,980 Mw coal-based capacity in FY24 and additional renewable capacities also expected to come into the fold by FY25.