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CIL’s relaxed production target still looks stiff

Source: Livemint, June 25, 2019

While the start to the fiscal year has been sluggish, Coal India Ltd (CIL) has not shied away from setting ambitious production targets. It expects to ramp up production to one billion tonnes by FY25. In FY19, it produced about 606 million tonnes (mt).

This implies an annual production growth target of about 8.7% for the next six years. Will the coal miner be able to achieve that?

Recall that CIL had initially set the one-billion-tonne target for FY23. However, due to production and dispatch bottlenecks, such as lack of rake availability, this has now been reset to FY25. Recall also, that it took the company three years to increase production from around 500 mt in FY16 to 606 mt in FY19. To meet its FY25 target, annual incremental production would need to be almost twice that rate at 66 mt a year.

Demand for coal, however, is expected to come from the power sector, particularly thermal power. The management noted that India will continue to rely on thermal power generation for the foreseeable future. CIL is aiming to replace the near 140 mt of imported non-coking coal with local output.

Toward this end, the management has talked about producing 660 mt in FY20, implying 8.9% year-on-year growth. Production in May has, however, dipped, and the full-year production target appears a shade stiff. The management clarified that the sluggish start was due to the cyclone in Odisha and weakness in the economy due to the recent general election.

However, to meet its target CIL will have much catching up to do. “In the light of the flat YTD May production growth, we believe achieving 8.9% YoY production growth could be challenging as: 1) four of seven subsidiaries, including the biggest, SECL, are lagging and 2) evacuation infrastructure in key subsidiaries, SECL, MCL and CCL (contributing 70% to additional production), is still ramping up," said Edelweiss Securities Ltd in a note to clients. SECL is South Eastern Coalfields Ltd, MCL is Mahanadi Coalfields Ltd and CCL is Central Coalfields Ltd.

“CIL plans to invest ₹10,000 crore in the next few years to procure heavy earth-moving equipment, i.e., excavators, dumpers, etc. Of this, ₹4,000 crore is expected to be spent in FY20. Apart from equipment, capital expenditure for FY20 is estimated at ₹10,000 crore," said Kotak Institutional Equities in a note to clients.

While all this sounds good, production challenges may keep a lid on valuation upsides.

News Source: Livemint