No. Coal is Not Dead.

India's economic growth has been among the highest in the world over the past two decades. According to the IEA, every year, the country adds a city the size of London to its urban population. This growth spurt has led to the vast construction of new buildings, factories and transportation networks.

Historically, coal and oil have served as the bedrock of India's industrial growth and modernisation, giving people access to modern energy services.

Despite this progress, the average household in India only consumes a tenth as much electricity as the average household in the United States.

India's sheer size and its huge scope for growth mean that its energy demand is set to grow by more than that of any other country in the coming decades.

Nevertheless, the rapid growth in fossil energy consumption has also meant India's annual carbon emissions have risen to become the third highest in the world.

It therefore makes sense that the government has announced more ambitious targets for 2030, including installing 500 gigawatts of renewable energy capacity, reducing the emissions intensity of its economy by 45%, and reducing a billion tonnes of CO2.

In this constantly evolving energy landscape, coal has often been dismissed as a dinosaur of the past. The entire carbon-emitting sector has been overshadowed by its sustainable alternatives, i.e., renewable energy.

Coal's Continued Role in India's Growth Story

However, recent trends have defied these expectations, displaying a surprising revival in the coal sector.

According to the National Electricity Plan-Volume-I, the total coal consumption in the coal-based power plants of the country has risen from approximately 608 million metric tons (MT) in 2017-18 to about 777 million MT in 2022-23, marking a compound annual growth rate (CAGR) of about 5%.

This unexpected resurgence can be attributed, in large part, to India's continued reliance on coal-based power generation, which accounts for the majority (49%) of the nation's installed power capacity.

As per a 2021 Draft NITI Aayog Report on "Coal Demand in India - 2030 and Beyond", demand for coal in electricity generation in India will remain and gain an increasing trend in the absolute term shortly. In percentage terms, the share of coal in the energy mix is likely to reduce from current levels of 72% to 52% by 2030, 43% by 2035 and 34% by 2040 due to the high penetration of renewable in the total energy mix.

Though the proportion of non-coal sources, particularly renewables, has and will increase, coal is anticipated to remain the dominant fuel source for electricity generation in India.

Moreover, India is most likely to lag in its renewable energy target for fiscal 2030.

Conversely, the Ministry of Power has raised the electricity generation target for the current financial year by 7.7%. Out of this, the thermal power has an expected share of 75%, giving coal producers a leg up.

Furthermore, domestic coal growth is expected to receive a boost from the substitution of imported coal. India's thermal coal imports have been on the rise, from 135mt in fiscal 2022 to 180mt in fiscal 2023. This presents a lucrative opportunity for coal producers to increase sales.

Investors looking to capitalize on this opportunity, need to add this government-owned monopolistic player to their watchlist.

Coal India - India's Coal Powerhouse

Coal India, the world's largest coal company by production, produces 80% of India's total coal volumes. It enjoys a near monopoly status in the Indian coal market and is the main supplier to power plants and other coal-consuming sectors.

While renewable energy has been the talk of the town, Coal India has defied expectations, consistently reporting its highest-ever sales and profits.

In the nine months that ended fiscal 2024, the world's largest pure play coal producer has reported its highest-ever production of 531.90 MT (up 11% YoY), revenue of Rs 1.04 trillion (tn) and net profits of Rs 238 billion (bn).

A large part of this growth was driven by favourable demand expected from key sectors such as power and steel. Additionally, the company effectively bridged the gap left by imported coal, further contributing to its success.

Coal India Financial Snapshot (2019-2023)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	16.30%	-2.90%	-8.30%	20.80%	27.50%
Operating Profit Margin (%)	14.20%	10.90%	20.90%	19.70%	16.60%
Net Profit Margin (%)	7.40%	5.40%	11.80%	11.80%	9.40%
Return on Capital Employed(%)	46.70%	45.50%	108.70%	73.10%	46.10%
Return on Equity (%)	31.30%	31.50%	74.90%	57.00%	37.00%

Data Source: Ace Equity

Between 2019-2023, the company reported a sales and net profit compound annual growth rate (CAGR) of 9.8% and 31.9%, respectively. The returns have been phenomenal with the return on equity and return on capital employed averaging at 53.7% and 70.8%, respectively over a 5 year period.

Coal India operates open-cast mines that account for ~90% of its production. It produces coal via seven different wholly-owned (100%) subsidiaries.

The company supplies a majority of its produce to the power sector through Fuel Supply agreements (FSA). The coal produced after meeting FSA demand is sold through e-auctions.

The coal sold under the E-Auction scheme is determined based on prevailing market prices and is significantly higher than the price of raw coal sold under the FSAs. In the nine months ending fiscal 2024, the company sold 10.5% of its production via e-auction.

The road ahead...

Going forward, the company is confident of maintaining the growth in production by ramping up production and incremental output from existing and new captive mines. It is confident of continuous demand from the power and steel sectors.

For fiscal 2024, the company has guided a total of 780 million MT while for fiscal 2025 838 million MTT. (7.4% YoY growth in fiscal 2025).

Rising coal production not only enhances the total revenue, it usually culminates in higher e-auction sales resulting in healthier profit margins.

For fiscal 2025, the company has outlined a capital expenditure (capex) of Rs 175bn, having spent Rs 135 in the nine months ending fiscal 2024.

Investments have been diverse, with capex on land acquisition and related rehabilitation accounting for Rs 24 bn. Heavy earth moving machinery procurement stands at Rs 19 bn, while diversification into areas like solar power and joint ventures with Hindustan Urvarak Rasayan Ltd and Talcher Fertilizers Ltd required Rs 10.4 bn.

The rest of the capex has been deployed for mine development, exploration, prospecting, among others.

Strategizing for value creation and growth

Apart from the tailwinds from volume growth and higher e-auction sales, the company stands to gain from the potential value unlocking of its subsidiaries.

The state-run miner is expected to launch the initial public offering (IPO) for two of its subsidiaries, Bharat Coking Coal Limited (BCCL) and the Central Mine Planning and Design Institute (CMPDI), in the fiscal year 2025.

BCCL produces the bulk of the coking coal mined in the country, meeting almost 50% of the total prime coking coal requirement of the integrated steel sector.

CMPDI is a premier consultant in open and underground mine planning and design in coal, lignite and other minerals. It has prepared over 900 mining project reports with individual project capacity up to 25 Mtpa.

During fiscal 2023, BCCL recorded a yearly profit after tax of Rs 6,450 m, up 4 times from Rs 1,116 m in 2021-22. Similarly, CMPDI reported a net profit of Rs 2,966 m in fiscal 2023, up 5% from Rs 2,821 m in fiscal 2022.

Back in 2022, the company announced that its board had granted 'in-principle' approval for divesting 25% of the paid-up share capital of BCCL and subsequently listing it on the stock exchanges. However, the listing of the subsidiary has yet to materialize.

Furthermore, Coal India is known for rewarding its shareholders with hefty dividend payments. It enjoys a rich dividend paying history, initiating dividends in 2004.

Over the past decade, Coal India has consistently maintained its dividend yield above 5%, amping it further in the last 5 years.

Coal India - Dividend Yield

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Dividend Yield (%)	5.10%	6.20%	11.70%	10.40%	11.30%

Data Source: Ace Equity

For the financial year 2023, the company's dividend yield was 11.3%.

Stock price movement

Given the company has been reporting record profitability, the stock price has doubled from Rs 214 in February 2023 to Rs 445 in February 2024.

It is now trading at enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple of 5.5 times. While the current ratio is at an 83% premium to its 5-Yr historical median of 3 times it is just a 12% premium to its 10-Yr median of 4.9 times.

In conclusion

Despite the surge in renewable energy, Coal India has proven its resilience, reporting record-breaking sales and profits. Recent trends suggest a surprising revival in the coal sector, with steady growth in demand over the past five years. With its dominant market position and the potential value unlocking from its subsidiary, Coal India presents a compelling investment opportunity amidst India's evolving energy landscape.

However, the company's long-term prospects are tied to India's ability to balance economic growth with environmental sustainability. Therefore, investors should carefully consider the risks and potential rewards before investing.

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