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Equity Research Equity Research INDIA September 22, 2020 BSE Sensex: 38034 Coal India BUY ICICI Securities Limited Maintained is the author and Potential 15% dividend yield, ESG compliance, distributor of this report demand recovery and attractive valuations! Rs122 Company update We hosted Mr. Pramod Agrawal, CMD, Coal India (CIL) for a session where the management highlighted CIL’s achievements in the past 45 years and its strategic Utilities/mining value for the nation’s energy security, while also addressing several issues raised by the investors. Out of these, five key areas which were addressed included: 1) future of coal in India and mutual co-existence with increasing RE capacity; 2) CIL’s production capability with a determination to reach 1bnte by FY24; 3) capex required Target price Rs258 to reach the target while simultaneously deploying several measures to control costs and improve efficiency; 4) firm and transparent capital allocation and dividend policy; 5) endeavour to improve on the ESG front, with compliance and disclosures as per Shareholding pattern Dec Mar Jun global standards. MTD Sep’20 has seen excellent numbers with production/offtake up ’19 ’20 ’20 23%/21% YoY, while OBR up 60% YoY. Management is confident of 660mnte Promoters 69.1 66.1 66.1 Institutional production target for the year helped by import substitution of 100mnte, and Sep’20 th investors 28.1 30.2 30.1 performance (till 15 ), where production/offtake/OBR are up 21%/22%/60% YoY, MFs and other 6.8 9.4 9.6 indicates the same. Maintain BUY rating and target price of Rs258. Insurance/FIs 12.7 12.6 12.6 On future of coal in India and mutual co-existence with increasing RE capacity: FIIs 8.6 8.2 7.9 Others 2.8 3.7 3.8 CIL continues to be the lowest cost coal producer globally, and with several measures Source: NSE being taken to further rationalise cost and infrastructure development (resulting in improved quality), cost per ton is expected to further decline. India’s per capita power consumption at 1,181 units is still much below the global average (2,674 units). Even Price chart considering the highly ambitious target of 450GW of RE in FY30E (from 123GW in 350 FY19), power demand growth taken conservatively at 6% and 8% (from FY22E 300 onwards) results in all-India total coal demand reaching 1,250mnte/1,500mnte by FY30. 250 Additionally, solar power sans financially viable and scalable battery storage will not be (Rs) 200 able to cater to the peak daily demand even at current levels of 170-180GW. Compared with the effective cost of solar power at Rs4-4.5/kWh, the variable cost of thermal power 150 currently stands at Rs2-3/kWh, which makes coal the cheapest source of power in the 100 country currently, despite solar tariff bids plunging to record lows. Further, with increasing cost of land acquisition and expected levy of transmission charges after 2-3 Mar-18 Mar-19 Mar-20 Sep-17 Sep-18 Sep-19 Sep-20 years, replacement of thermal power by solar power on such a scale does not look feasible in the medium-to-long-term. Thus, we believe that coal will remain the vital fuel for India’s energy security for the next 1-1.5 decades. On CIL’s production capability with a determination to reach 1bnte by FY24: CIL targets to reach 1btpa production by FY24, which translates into a CAGR of 13.5% from FY20 (602mnte). CIL is investing in several infrastructure projects to improve evacuation and mechanise production in order to reach this target. CIL also targets to substitute 100mnte/150mnte imported thermal coal by FY21E/FY22E. On GCV terms, substitution of 150mnte of imported coal will be equivalent to ~200mnte of domestic coal. In YTDFY21, the increase in e-auction to 39mnte, despite the tepid offtake environment, points to the fact that many coal importers have participated in CIL auctions and there has been substantial import substitution. FY21 production target is 660mnte while e- auction target is 20% of the total production. Research Analysts: Market Cap Rs752bn/US$10.2bn Year to Mar FY19 FY20 FY21E FY22E Reuters/Bloomberg COAL.BO/ COAL IN Revenue (Rs mn) 995,469 960,803 939,410 1,031,607 Rahul Modi [email protected] Shares Outstanding (mn) 6,162.7 Net Income (Rs mn) 174,622 167,003 153,436 189,905 +91 22 6637 7373 52-week Range (Rs) 218/119 DEPS (Rs) 28.3 27.1 24.9 30.8 Abhijit Mitra Free Float (%) 30.9 % Chg YoY 150.6 (4.4) (8.1) 23.8 [email protected] FII (%) 7.9 P/E (x) 4.3 4.5 5.5 4.4 +91 22 6637 7289 Anshuman Ashit Daily Volume (US$/'000) 21,788 CEPS (Rs) 42.2 41.7 39.6 46.4 [email protected] Absolute Return 3m (%) (11.4) EV/E (x) 1.5 2.4 3.6 2.2 +91 22 6637 7419 Absolute Return 12m (%) (39.2) Dividend Yield (%) 10.8 9.9 16.4 16.4 Sensex Return 3m (%) 10.1 RoCE (%) 60.7 43.7 36.9 39.3 Sensex Return 12m (%) 1.2 RoE (%) 65.0 51.3 43.1 45.0 Please refer to important disclosures at the end of this report Coal India, September 22, 2020 ICICI Securities On capex required to reach the target, while simultaneously deploying several measures to control costs and improve efficiency: CIL is currently implementing 110 projects, with peak capacity of 750mnte. Further, 18 mining projects, with cumulative rated capacity of 132.04mtpa, has been cleared in FY20 with total sanctioned capital of Rs212.5bn. CIL is also implementing First Mile Connectivity projects, wherein, in phase-I, 33 projects have already been tendered out and the remaining two projects are expected to be tendered out by Sep’20-end (two projects of 26mtpa capacity already commissioned). The total capacity of these projects will be 406mtpa and this will require an investment of Rs125bn. In phase-II, 14 projects with total capacity 100mtpa, which will require an investment of Rs35bn, will be implemented. These projects are expected to help increase mechanized evacuation from 150mnte currently to 650mnte. Target completion of all the projects is by FY25. CIL expects >12% IRR from all the projects. Improvement in coal quality, savings in under-loading charges (Rs10bn p.a.) and a positive impact on the environment will be additional outcomes from these projects. In addition, currently CIL incurs Rs34bn on transportation charges on coal annually, which is expected to decline substantially. For evacuation, CIL is developing 12 railway lines (estimated investment Rs198bn), 21 railway sidings (estimated investment Rs35bn) and 33 coal trunk roads, operationalisation of which are expected by FY24 (two lines already operationalised). CIL has identified and already closed 82 mines in the past 2-3 years and will either close or turnaround 23 more mines in FY21. Further, it will identify more mines for closure/turnaround in FY22. Closure of these mines is expected to save the company over Rs5bn p.a. even after considering all the closure cost (including labour costs). Further, output per man shift will see a significant boost. The company is also looking to implement Voluntary Retirement Scheme (VRS) at most of its subsidiaries and is at advanced stages in WCL, although taking into consideration the current environment, the implementation in other subsidiaries may be delayed. On a firm and transparent capital allocation policy and predictable dividend: CIL estimates a cumulative capex of ~Rs700bn-Rs800bn over the next 6-7 years on various projects in order to reach its 1btpa target. Translating to over Rs100bn p.a., the capex is contingent on power/coal demand growth. In case such capex is incurred in totality, we expect CIL’s profits to increase by 50-70% over FY20 profit levels of Rs167bn. In FY22, CIL will endeavour to clock more than 700mnte volumes and with operating leverage benefit, we expect it to surpassing its past peak profit of Rs170bn. The company has indicated that majority of the cash that is available after capex requirement will be given out to the investors through dividends. On CIL’s endeavour to improve on the ESG front, with compliance and disclosures as per global standards: CIL is preparing a third party ESG report, which is expected to be released by FY21-end, which will help align its compliance and disclosures as per global standards. It is already working on improving on the environment front through the various projects, is one of the foremost company’s on the social front, with CSR spends of over Rs30bn since FY16, and has the highest governance standards being a GoI entity and audited 2 Coal India, September 22, 2020 ICICI Securities by the CAG. It is also implementing SAP ERP system starting with HQ, WCL and MCL (expected to go live by FY21-end) and will implement the same at other subsidiaries in the next phase. On current month’s performance: For MTD till 15th Sept’20, production was up 21% YoY at 19.6mnte, while offtake was up 22% YoY at 23mnte. This performance was on the back of high growth at MCL (+60% YoY), CCL (+30% YoY), WCL (+70% YoY) during the same period. In addition, OBR for the same period is up 60%YoY. At the current rate, CIL is expected to achieve 40mnte of production in Sep’20 (+30% YoY) and 45mnte of offtake (+28% YoY). This will be on the back of 9.2% growth in coal generation till 15th Sep’20.
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