Coal India shares dip 3% as competition from private miners looms

Lead time for mine development, challenges in commercial mining are issues NTPC and private miners will have to overcome

Even as there were concerns on Coal India (CIL) facing competition from private merchant miners, NTPC’s announcement about forming a subsidiary to undertake coal mining business has compounded CIL’s woes. Shares of CIL, which have lost more than a third since June, fell 2.3 per cent on Friday.

CIL supplies a majority of its produce to the power sector, with NTPC being its key customer. If NTPC develops its own mines, CIL would face the risk of losing business worth over 100 million tonnes (mt), given its coal supplies to India’s largest power generator. 

The government clearing 100 per cent foreign direct investment in commercial coal mining has also added to the concerns for CIL, with respect to competition from private players. Additional overhang emerges from the expected stake sale in CIL by the government (owns about 71 per cent) to meet its divestment target. The declining e-auction realisations, which track market prices, could also hurt CIL’s near-term profits. 

Analysts also feel that competition from private players or NTPC may not pose an immediate threat to CIL, given the long gestation period of three-five years for any new mine to become functional. That’s because, the allocation/auction process is followed by lengthy land acquisition and environment forest clearance procedures. Mine development itself is time-consuming and challenging. Also, there is a huge gap between domestic coal demand and supply, which results in 100-120 mt of imports annually. 

Analysts at JM Financial feel that the new commercial coal production will first cater to the gap in domestic supply through import substitution. Emkay Global said it is still some time away for merchant coal mining, given the overarching presence of CIL, shortage of rail rakes, time taken for land acquisition, and various approvals from local/state/central governments.

NTPC, too, may require time to develop mines. Analysts point out that NTPC is yet to completely develop the captive coal blocks allocated to it in 2007-08. Further, even if it enters the coal mining business, it will have to compete with other private merchant miners. The margins thereby may be return-on-equity dilutive, points out Rupesh Sankhye at Elara Capital. Not surprising, NTPC, too, lost 6 per cent in intra-day trade before closing a per cent down on Friday. Lastly, many of its plants are near pitheads (coal mines), which ensures availability of coal at low costs (saving on transportation and working capital). 

The jury is still out on how much of an impact the recent developments will have on CIL, which also has time to put its act together.