Today's Top Gainer
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Coal mining in India has a long and cherished history that dates back 230 years back in time to the year 1774 when the East India Company commissioned the first mine in the Raniganj coal fields, now the eastern state of West Bengal. The biggest boost to coal mining in the pre-independence era was provided by the introduction of steam locomotives in 1853.
Post independence, the industry has come a long way but it now yearns for a boost in production and supply, notwithstanding the government support through nationalization and nominally deregulated pricing.
With a likely annual increase of 10 per cent in India’s coal demand over the period FY11 -17, the supply is expected to struggle to keep pace with the burgeoning demand. Even if we assume rapid growth in private captive mining, domestic supply, at best, is expected to be around 7.1 per cent annually.
This supply side lethargy is largely due to the string of constraints including approval & clearance delays besides the Naxalite threat.
Obtaining approvals for Greenfield industrial sites is a cumbersome process in India that can even take five years to fruition. The ministry of coal has a comprehensive check by an expert committee before the linear approval process can begin. Worse, the facts that most of India’s coal-bearing areas are forest lands, additional forest clearances eat into the lead time, apart from the normal environment clearances. The disputed Go-No Go classification of the Ministry of Environments and Forests has marred the prospects of many a planned projects. The ministry’s recent No Go cut down following huge protests may spell good news for the industry. The growing awareness among tribals and local inhabitants poses land acquisition and employment challenges as well. Higher compensations for acquisition spell heavy start-up costs, agitations can even lead to scrapping of plans. The recent Vedanta mine story is a case in point. That each state has its own R & R policy makes the rehabilitation packages unique for each state. There’s little generalization from a macro perspective.
Prominent Naxalite presence in the areas of India’s coal reserves is another serious threat. Operational disruption, material delays and law & order challenges are a business reality in the Naxalite-dominated states of Jharkhand, Chhattisgarh, Orissa and West Bengal. And adding to the litany of constraints is the logistical challenge with most ports and railway networks crying for capacity enhancements.
India’s coal-based power generation under construction capacity implies 396m tones of additional coal requirement, comprising 70 per cent of India’s FY10 coal production. Taking into account EPC orders from public and private utilities in the next two years as also assuming slippages and execution lead time, a visibility for 108W of capacity addition (15.5GW of new capacity annually over the next seven years) is estimated by FY17. This forecast seems aggressive when compared to the 5.1GW/year run-rate achieved over FY08-FY10 as these are bottom-up aggregates.
Having said that, both public and private sector companies have consistently missed production targets over the years. The largest player, Coal India has invariably struggled to meet its production objectives. The seemingly small annual shortfalls have had a cumulative effect over the years. The current FY12 production target is 6.5 per cent lower than the originally estimated. To boost production, the government has been allocating coal blocks to PSUs for captive consumption since the 90s. But out of the 215 captive blocks, a mere 26 have seen the light of the day.
At 226m tonnes, India’s GCV-adjusted imports would account for 20 per cent of the global coal trade in FY17. For the steel sector, imports would continue to be the main source of coal supply owing to the limited domestic coking coal production. Overall, the imports are likely to increase by 240 per cent by FY17.
The largest player, Coal India accounted for 81 per cent of India’s domestic coal production in FY10. In the process, it has achieved a profit CAGR of 23 per cent over FY04-10, helped by a 6 per cent CAGR in both production and prices. In my estimate, the production CAGR would settle at 5.5 per cent over FY11-17. On the pricing front, the company stands to gain from the growing flexibility to link production to global prices. This should garner upsides from global prices and downside cushion from the sale of bulk output at steep discounts to market prices. Over the period FY11-17, the company is expected to clock a 10.2 per cent sales CAGR and 13 per cent profit CAGR, largely through efficiency gains following reduced manpower.
Coal India has the potential to trade at a handsome premium over global peers provided it can tide over the constraints of production, growing proportion of lower-grade coal and the resource base locked in weaker subsidiaries.