Coal India Stock Analysis

Coal India Limited (“the Company” or “CIL”) is an Indian state controlled coal mining and refining company. It is the largest coal-producing company in the world. Coal India accounts for 83% of the India’s coal output.

Coal is the primary source of energy in India. It is used mainly to generate electricity but is also used in the steel and cement industries. Nearly 72% of the electricity generated in India is coal based and coal accounts for 55% of India’s primary commercial energy. The Indian government has been pushing to increase the share of renewable energy and plans to increase renewable energy capacity from current 78 GW (Giga Watt) to 175 GW by March 2022. Despite this push coal seems to be irreplaceable in future. Several studies including one conducted by government body NITI Aayog have pegged coal to still be responsible for 44%-48% of the energy produced in India by 2040.

Financials

Sl No

For The Year Ending 31st March

2019

2018

2017

2016

A

Earned From

 

 

 

 

 

Gross Sales (Coal)

1,40,603.00

1,26,543.97

1,22,286.96

1,08,147.54

 

Less: Excise Duty & Other Levies

47,706.92

45,432.71

46,684.10

32,505.76

 

Net Sales

92,896.08

81,111.26

75,602.86

75,641.78

 

Other Operating Revenue (Net of Excise Duty)

6,650.81

4,132.98

2,808.35

2,365.85

 

Other Income

5873.73

4,974.88

5,324.21

5,940.58

 

TOTAL (A)

1,05,420.62

90,219.12

83,735.42

83,948.21

B

Paid to / Provided for

 

 

 

 

 

Employee Benefits Expenses

38,770.10

42,621.84

33,522.88

30,126.78

 

Cost of Materials Consumed

7,331.43

6,813.33

6,968.52

7,039.76

 

Changes in inventories of finished goods/work in progress and Stock in trade

856.24

1,679.46

-1,238.38

-1,444.22

 

Power & Fuel

2,443.08

2,516.42

2,546.45

2,490.54

 

Corporate Social Responsibility Expenses

416.47

483.78

489.67

1,082.16

 

Repairs

1,446.41

1,439.01

1,285.92

1,241.67

 

Contractual Expenses

13,377.99

12,757.28

12,303.03

11,128.42

 

Finance Costs

 

 

 

 

 

Unwinding  of  discounts

265.48

393.59

378.55

365.51

 

Other finance costs

9.56

36.51

30.63

20.65

 

Depreciation/Amortization/Impairment

3,450.36

3,062.70

2,906.75

2,825.91

 

Stripping Activity Adjustment

5,071.19

3,358.25

2,672.21

2,811.42

 

Provisions & Write Off

115.72

82.61

2,331.95

884.57

 

Other Expenses

4,741.13

4,204.03

5,090.91

3,935.24

 

TOTAL (B)

78,295.16

79,448.81

69,289.09

62,508.41

 

Profit before exceptional items and Tax (A-B)

27,125.46

10,770.31

14,446.33

21,439.80

 

Exceptional Items

0.00

0.00

0.00

0.00

 

Profit  Before Tax

27,125.46

10,770.31

14,446.33

21,439.80

 

Less: Tax Expenses

-9,662.45

-3,732.31

-5,164.79

-7,171.87

 

Profit for the period from continuing operations

17,463.01

7,038.00

9,281.54

14,267.93

 

Profit/(Loss) from discontinued operations (after Tax)

 

 

-0.01

-0.01

 

Share in JV’s/Associate’s profit/(loss)

-0.83

0.44

-1.76

-1.14

 

Profit For the Period

17,462.18

7,038.44

9,279.77

14,266.78

Coal India has been showing consistent growth in the past few years, the Company posted a profit of Rs.17,462.18 crores in FY19 compared to Rs.7,038.44 crores in FY18. Profits for FY19 were much better compared to the previous year on account of improved realization from coal sales, higher premiums in e-auctions as well as lesser outgo on account of employee benefits (benefits amounted to Rs.5,000 crores in FY18). CIL posted improved results in Q1 FY20 as well. It’s net profit increased 22.3% y-o-y and revenue rose 3.6% as compared to previous year to Rs.24,939 crores.

Coal India in FY19 breached the 600 Million Tonne (MT) mark and produced a total of 606.89M MT of coal registering a growth of 6.97%. Despite having increased its production, CIL is still unable to meet its supply goals. CIL has missed it supply target for 4 consecutive years and is in line to miss its target for the 5th year as well by about 168 MT. These supply woes have been estimated to continue till 2025-2026, or when the Company achieves the 1 Billion Tonne mark. The Company has set a capital expenditure target of Rs.10,000 crores for FY20 of which a significant amount will be spent in diversification projects as well as acquiring coking coal assets in Australia and Canada. Coking coal which is mainly used in steel production accounted for only 5% of the coal produced by CIL.

Issues with Production & Prices

Production 

The primary reason for the shortfall in production can be the fact that despite having about 369 mines only 26 major mines are commercially and technically viable. Apart from this, there are several other issues which the company has to deal with which hinder production, such as extreme weather conditions, law and order issues and issues with miners. Coal India also faces delays in new projects which it wishes to pursue. Delays are often contractual but a majority are caused due to delays in obtaining environment and forest clearances. As of August 2019, 54 of 120 CIL projects are delayed. These issues in production cause India to import a lot of coal. The coal imports were 233.56 MT in 2018-19 up 8.8% from the previous year. 

Pricing 

Coal India fixes the price of coal itself, based on the type and calorific value (energy produced) of the coal.  It sells its coal primarily using Fuel Supply Agreements (FSA) with various state owned and private companies, these FSA’s have within them, the price and quantity of Coal to be sold to the buyer. Old FSA’s which came into effect before 2009 are binding for 20 years and are revisited every 5 years like a 5-year government plan. The new FSA’s that CIL is engaging in are binding only for 5 years. These FSA’s hinder profits for the company as the price is fixed in well in advance and don’t represent the actual prices prevailing in the market. CIL makes much higher profits when it sells its Coal in the spot market via e-auctions, but a very large part of their production gets tied up with these FSA’s and they are hence unable to utilize this avenue well.

Why not increase pricing if there is excess demand? 

If there is such a large gap between demand and supply of coal, then why does Coal India not jack up the price and make larger profits? Being a government controlled entity and producing a commodity which is central to the progress of the country, it will not be permitted to increase its prices as it pleases, and will face heavy resistance by the government and the ministries which regulate it. Also the loss making state of power producers and DISCOM’s (distribution company) in the country will further ensure that the profits the company will make, would be just enough to satiate Government needs.

Strong Government owned monopoly with high dividend yield 

Coal India is a financially strong Company; it has good operating margins at 26.5%, has shown consistent growth in revenue and profits and is also committed to increasing production and fulfilling the indigenous demand for coal in the country. But the fact remains that Coal India is a government owned company and operates as one. Also the fact that it is in the business of mining and producing such an important commodity it has to deal with several legal and regulatory issues.

Apart from this Coal India is a major contributor to the government’s coffers which it fills via dividends. This is a double edged sword for prospective shareholders, as though this makes it a high dividend yield stock with a 6.82% dividend yield, it also reduces its investment opportunities to help improve production.

P/E Analysis

Year

2019

2018

2017

2016

2015

EPS

28.14

11.31

14.80

22.59

21.73

PRICE

236.10

283.3

292.65

291.95

362.9

P/E Ratio

8.39

25.04

19.77

12.92

16.7

The Average 5 Year P/E is 16.56, the current market price is at 185 and the EPS (TTM) is 29.7, giving it a current P/E ratio of 6.22. The stock therefore is trading at a discount of 62% compared to its historical P/E.

Why is Coal India Stock trading so cheap?

At its current price, Coal India is an attractive stock, especially for an investor looking for consistent and high dividend yields. Coal being the backbone of the power industry should ensure that the earnings of the company remain stable. Coal India is also on a mission to keep up with the rising demand and achieve its production targets so there should not be a fall in revenue or profits. However, there is a looming danger of another significant divestment by the government of India. The government has been systematically reducing its stake in PSU’s and reduced its share in CIL by about 8% from September 2018. This increase in the float has also contributed to a fall in the share price.