Robust production, new initiatives to drive growth for Coal India

Coal India looks set to achieve its 2024-25 (FY25) production targets. If it can achieve its aim of ramping up Fuel Supply Agreement (FSA) and e-auction volumes, along with cost-saving, evacuation and infrastructure-improvement projects, the company could maintain its momentum as a critical infrastructure and core industry performer.

Analysts estimate e-auction volumes of 108 million tonnes (MT) in FY25 and 120 MT for FY26, which is encouraging given the premium of e-auction prices which are consistently over 50 per cent higher than FSA. Global coal prices are down, due to oversupply in China and e-auction prices remain range-bound between Rs 2,300-2,600/tonne between Nov’23-Apr’24 vs Rs 3,431/tonne in April, 2023.

Government policy is to reduce coal imports (269 MT in FY24, up 11 per cent YoY) and increase domestic production through faster operationalisation of more mines and increasing participation of the private sector. The Ministry of Coal has allocated or auctioned 161 coal mines with peak rated capacity of 575 MT. Of these, 54 are in operation, producing 147 MT in FY24.

CIL has also intensified its capex.

It spent Rs 64,000 crore in the last four financial years with another Rs 34,000 crore of capex likely over the next two years to push the production to 1billion tonnes of production over 2-3 years. It has invested in land, increasing rail connectivity and capacity, undertaking first-mile connectivity (FMC) projects for evacuation, setting up washeries, improving machinery among other measures.

CIL holds near-monopoly status with around 78 per cent of domestic coal offtake and a FY25 sales target of 838 million tonnes, with a mid-term target of 1 billion tonnes. The implied share of e-auction volumes would increase from 9 per cent to 13 per cent over next two years. The company may also decide to treat the provision for stripping or overburden removal differently, reversing this credit balance and placing it on the P&L account. This could lead to Rs 5,500 crore-6,000 crore per annum more in the way of reported profits.

CIL reported strong production growth in Q1FY25.

All subsidiaries posted production growth with five of them surpassing their respective targets for Q1FY25. The sales volume in Q1FY25 rose 5.1 per cent YoY to 64.1 MT aided by subsidiaries like SECL and MCL. 

Despatches to the non-regulated sector (NRS) was 19 per cent of overall sales, up 16 per cent YoY. Rail rake availability improved for the power sector, while pit-head inventory, at end-Jun’24, was at 81.5 MT (up 40 per cent YoY), lower than end-Mar’24 level of 88.1 MT. NRS offtake may remain high, leading to higher blended realisation because power plants with FSA have sufficient supply.

CIL has also awarded 23 discontinued mines to the private sector on a revenue sharing model, with a cumulative peak rated capacity of 34.14 million tonnes with estimated total extractable reserves at 635 million tonnes.

These were not financially viable for CIL but tenders have resulted in private operators coming in with the contract period extending up to 25 years, with minimum revenue share of 4 per cent.

These were out of 34 identified mines, mostly belonging to CIL subsidiaries. The private operator will sell coal mined from these at market price through auction on behalf of CIL.  This is a positive outcome. CIL is also setting up 3GW solar power capacity by FY26.  A JV, Bharat Coal Gasification and Chemicals has been formed with BHEL, for coal-to-chemicals business.

The stock is up 110 per cent in the last year and most brokerages have a buy rating.