Industry Risk Score

Bank of Maharashtra Jul-2023

Coal Mining

Introduction Contents
Industry Risk Score (IRS) reflects the impact of industry variables on the cash Executive summary 3
flows and debt repayment ability of the companies in the industry over 3-4
years. The risk score for an industry is arrived at, by aggregating the scores
assigned to the parameters relevant for the industry.
Background 4

Industry parameters include variables such as demand-supply outlook, cost Industry risk parameters 4
structures, competition and financial performance. The
parameters are selected based on the extent to which they affect the debt-
servicing ability of the companies operating in the industry.
Scores on these parameters reflect the extent of positive/negative impact on Demand-Supply 5
cash flows, and the degree of variability in cash flows of the
companies.

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Government policies 5

The industry risk scores have been graded on a ten-point scale, with 1 ah ara
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indicating high risk and 10 indicating low risk Input-related risk 5

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Risk Score Risk factors
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1
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Extremely negative
Extent of competition 6
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2 sol negative
Extremely
e
h Financial risk 6
3
sf or tNegative
4
e n ti Marginally negative
t Annexure 7
5
s con Neutral
6
Thi Marginally positive
7 Positive
8 Positive
9 Highly positive
10 Highly positive
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Executive Summary

In fiscal 2023, coal production clocked in a growth of 14.7% over a high base of 8.5% y-o-y growth in fiscal 2022 boosted by the focus
on import substitution coupled with high demand from end-use segments. Consequently, we see production growing at a CAGR of
4.5-5.5% backed by healthy growth in demand from key end user sectors.

Opening of new mines and expansion of current mines as well as removal of logistical bottlenecks by commissioning of key railway
projects in Jharkhand, Odisha, and Chhattisgarh is expected to support growth in coal production.

Power sector is the major consumer of coal, accounting for ~70% of annual coal consumption in India. Power demand increased by
9.6% on year in fiscal 2023 on a high base of 8.5% witnessed in fiscal 2022. While government schemes on the transmission and
distribution (T&D) side are expected to boost electricity demand over the medium term, which will support the growth of coal
production, coal-based power generation is expected to remain stable over the longer term despite higher RE penetration, as high
power demand keeps requirement high. As the government pushes towards cleaner energy sources, coal will be displaced by higher
wind and solar penetration into the electricity mix gradually over the longer term.

Until now, Coal India Limited (CIL) and Singareni Collieries Company Limited (SCCL) were allowed to carry out commercial mining in
India, with private entities restricted to mining coal for captive usage. However, the government has removed the restrictions for private
players via The Mineral Laws (Amendment) Act, 2020, permitting them to enter into commercial mining. The operationalization of
commercial coal mines is expected to bring competition and efficiency into the coal sector post fiscal 2025 through private participation.

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Parameter Weightage Score
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Coal Mining:Industry Risk
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6.80
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use
Industry Characteristics 85.00 6.90

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Demand Supply Gap 30.00 8.00

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ent
Government Policy 30.00 5.00

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his
Input Related Risk 20.00 7.00
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Extent of Competition 20.00 8.00

Industry Financials 15.00 6.22

Operating Margin of Industry 70.00 4.60

ROCE of Industry 30.00 10.00

Background

Coal mining sector is primarily concerned with the production of coal which is used in sectors such as power, cement, sponge iron and
steel. In India, government owned entities namely CIL and SCCL dominate the coal mining sector.

Previously, private players were barred from commercial production of coal, with mining licenses restricted for captive production with
designated end-use. However, the government introduced commercial mining for private players via an amendment to Mines & Mineral
(Development and Regulation) Act 1957 and The Coal Mines (Special Provisions) Act, 2015, permitting private players to enter into
commercial mining without the restriction of captive end-use for the coal mined. The latter will allow a wider set of entities to participate in
the coal auctions henceforth, however, other factors would also play a role in the success of this policy.

Abundant coal reserves mitigate input related risks. In terms of end-use, competition for the major end-user, the power segment, is
expected to increase from the renewable sector over the medium term as India looks to gravitate towards an ambitious non-fossil fuel
capacity of 500 GW by CY2030.
The debt-to-equity ratio for the industry stands at 0.1 as of March-2022, indicating comfortable leverage positioning for the industry. This
is backed by easing working capital liquidity conditions and is expected to remain at comfortable levels in the near future.

An increase in the industry’s profitability margins from 21% in fiscal 2021 to 23.1% in fiscal 2022 has augured well for its interest servicing
capabilities and has boosted it to 52.8 in fiscal 2022 from 34.8 in fiscal 2021.

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Industry Risk Parameter
Demand-supply

Coal production is forecasted to increase at a CAGR of 4.5-5.5% over fiscals 2023-2028. Over the same period, coal demand is expected
to be supported from key end use segments of power, cement and steel supporting coal production. As economy recovers and sustains in
fiscal 2023, power demand scenario and demand for commodities (cement, sponge iron etc.) are likely to increase offtake.

Imports for non-coking coal increased by ~20% in fiscal 2023 to 181 MT because of push from central government to use imported coal
for blending in power plant consumption. Overall, import substitution will be the highest in the non-power segments where imports on an
annual basis decline from ~105 MT in fiscal 2024 to 10-20 MT in fiscal 2028.

On coking coal front, raging fires in Jharia coalfields along with high ash content of Indian coking coal continues to bear down on domestic
supply. Further, high washing requirement reduces the finally usable volume of coking coal (almost halving of volume from mined material
to usable material). Hence, imports are expected to remain elevated at >80% of total consumption. Imports of coking coal would reach
~72-75 MT by FY2028 given the current charted trend of steel capacity expansions and the rising share of BF-BOF in the capacity mix.
Domestic production is expected to grow at a healthy pace going forward, driven by government’s focus on import substitution. CIL is
expected to ramp up production in a bid to achieve its production target of 1 billion tonnes, thereby gradually reducing imports over the
long term, particularly for non-coking coal that is abundantly available in India.

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Government policies

Government policies play a significant role in the sector. The coal mining and production sector was nationalized in the 1970s, with CIL
(through its subsidiaries) and SCCL tasked with commercial operations in coal mining.

In March 2020, the Parliament of India passed The Mineral Laws (Amendment) Bill, 2020 for amendments in Mines & Mineral
(Development and Regulation) Act 1957 and The Coal Mines (Special Provisions) Act, 2015. The Act removed the restriction on prior
experience in coal mining and allows auction of unexplored and partially explored coal blocks for mining through prospecting license-cum-
mining Lease (PL-cum-ML). The Act also removed the end-use restriction, thereby allowing coal mining for own consumption, commercial
sale or for any other purpose, as may be specified by the Central Government. As of June 2023, 70 mines have been auctioned off under
6 tranches while the 7th tranche in currently under way.

In addition, the government plans to expedite the process of clearances for mining as well as fast-track coal evacuation projects over the
medium term. However, it continues to remain a largely regulated sector with high taxation such as cess for clean energy, sand mining
cess etc. Government has also proposed to start a coal exchange to trade coal mined from private commercial mines and set up a mature
trading market. Government is also in the process to implement Coal Import Monitoring Systems that would collect information about coal
imports to keep a tab on imports and drive initiatives to boost domestic production. Such new initiatives as announced by the government
in this sector will be key for future improvements in performance of the coal mining entities.

On the coking coal front, there have been talks of bumping domestic supply. According to Coal Ministry Action Plan (CMAP) CIL has a
target of producing ~20-25 MT of raw coking coal by FY25. However, high ash content, high washing requirement and constrained
washeries capacity to hinder supply to steel sector.

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Input - related risk

India is one of the largest coal producers in the world with coal reserves of ~326 billion tonnes spread over 27 mining areas as of April
2019. The government owned CIL and SCCL have minimal input related risk as the allocation of such reserves by the government
ensures availability of raw material. Even for private players, who acquire mining rights through the auction route, availability of ample
reserves mitigates any such risk.

However, employee related costs, which accounted for 34% in fiscal 2023 and 36% on average between fiscal 2021 and 2023, constitute
the highest costs for Coal India. In January 2023, the govt. approved a 19% wage hike for CIL and SCCL non-executive employees. To
offset this increase, the govt. announced a 8% revision in the notified prices for non-coking coal grades between G2-G10 effective from
31 May 2023.

Secondly, quality of coal reserves available in licensed mines can pose a challenge to players, where actuals may differ from initial
estimates regarding the grade of coal mined.

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Extent of Competition

Bulk of mining and production rights are expected to remain vested with CIL and SCCL. Even with the implementation of the commercial
mining policy for private players, we do not expect the competitive dynamics to alter significantly over the near term as these mines are
expected to start production only nearer to fiscal 2025. Consequently, competition is expected to remain limited till then. We expect ~28
MT of non-coking coal and 1.05 MT of coking coal to be added from the first tranche of commercial mines to supply by fiscal 2025. This
would constitute <5% of overall non-coking coal and coking coal supply in India respectively. Starting fiscal 2028, we expect ~99 MT of
additional coking and non-coking coal to be added from the latest 5/6th tranche of the bidding process. As of June, the auctions under the
7th tranche are under process with 35 bids being received against 103 mines that were put on offer.Imports continue to remain costlier
than domestic coal. The price of Indonesian non-coking coal is expected in the range of Rs 7,255- 7,260 per tonne in fiscal 2024 whereas
domestic linkage based thermal coal would cost in the range of ~Rs 3,024 per tonne (landed costs). Overall, non-coking coal prices in CY
2023 are expected to end at USD 175-185 per tonne and USD 50-60 per tonne for the Australian and Indonesian variety respectively.
Australian thermal coal prices witnessed a spike post EU’s sanction on Russian gas, thus the bloc resorted to high calorific coal available
from Australia as a replacement for gas. Australian prices to moderate in CY 2023 as Europe’s energy security concerns wane as
Norway and USA have replaced Russian gas in the EU. Lower LNG prices in Europe and Asia are increasing coal switching in Europe
and key Australian export nations like Japan. Indonesian prices are expected to soften due to both demand and supply dynamics at play.
Key consumers, China and India are expected to increase domestic production and decrease their reliance on imports. Easing of weather
related issues like rainfall in Indonesia’s key mining regions will increase supply pushing prices down. Covid-19 resurgence and
associated impact in China remains a key monitorable.Imported Australian coking coal will trend at USD 240-290 per tonne in CY 2023 as
better weather conditions for mining and supply will ensure sufficient material availability in the market, which, along with sluggish global
steel demand, will lead to see price corrections.
Financial Risk
Coal Mining: Financial parameters

Parameter Units Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22

Aggregate turnover Rs million 1,105,8 1,250,3 1,303,1 1,446,0 1,390,0 1,314,5 1,581,6
61 27 16 74 27 00 54
Operating profit margin Per cent 20.5 13.5 7.8 25.5 23.4 21 23.1
Return on capital employed Per cent 129.4 51.2 54.9 134.6 81.5 49.9 58.2
Net profit margin Per cent 16.7 10.8 7.4 17.4 17.2 14 15.7
Return on equity Per cent 82 31.1 31.2 74.4 56.4 36.7 43.3
Interest coverage ratio Times 64.1 43.7 33.4 113.1 55.7 34.8 52.8
Debt-equity ratio Times - 0.1 0.1 0.1 0.2 0.2 0.1
Current ratio Times 2.3 1.6 1.4 1.5 1.7 1.6 1.6
Assets turnover ratio Times 7.4 3.4 3.2 2.8 tra
sh2.2 1.8 1.9
Raw materials days Days 63 70 66 h
60a ra 62 54 60
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WIP holding days Days 1 1 1 of 1 1 1 -
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Finished goods days Days 33 36 20 25 39 23
Debtors days Days 38
se o31 24 14 38 54 26
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Creditors days Days
sol30 39 34 33 52 505 265
Nos. of companies No
or the 1 1 1 1 1 1 1
Source: CRISIL Research is f
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Coal Mining:Cost aggregates
Cost Structure (% T
h
of net Sales) Units Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Raw material cost Per cent 6.5 6.7 9 8.1 6.3 6.1 10.7
Power and fuel cost Per cent 2.9 3 2.6 2.4 2.6 2.8 2.4
Other operating costs Per cent 28.4 30.3 30.8 20.4 22.3 20.9 21.8
Employee cost Per cent 35.2 39 44.7 38.6 40.7 42.7 36.9
Selling cost Per cent 6.5 7.6 5.1 4.9 4.7 6.6 5.2
Annexure
Companies used for calculating sector aggregates
Coal India Ltd.-(Consolidated),
N.A.

Coal Mining- Sector Aggregate - Interim results

(Figures in Rs Million) Jan-Mar 2022- % of Jan- % of Apr- % of Apr- % of

23 net Mar net Mar net Mar net
Sales 2021- Sales 2022- Sales 2021- Sales
22 23 22
Net sales 351,614 100.0 300,46 100.0 1,276,2 100.0 1,006,2 100.0
3 75 34
Total Operating exp 312,542 88.9 236,28 78.6 1,014,3 79.5 850,23 84.5
0 40 0
Raw Material exp 38,862 11.1 33,308 11.1 135,57 10.6 94,422 9.4
0
Purchase of Finished goods 248 0.1 -78 -0.0 4,697 0.4 1,036 0.1
Change in stock -27,967 -8.0 -22,609 -7.5 -6,781 -0.5 23,085 2.3
Salaries and wages 169,828 48.3 108,22 36.0 494,09 38.7 407,00 40.4
6 2 8
Power & Fuel 6,972 2.0 6,062 2.0 27,599 2.2 26,385 2.6
Rent & lease rent - 0.0 - 0.0 - 0.0 - 0.0
Selling & distribution expenses - 0.0 - 0.0 - 0.0 - 0.0
Other expenses 124,598 35.4 111,37 37.1 359,16 28.1 298,29 29.6
0 4 5
OPBDIT 68,981 19.6 90,788 30.2 368,17 28.8 246,90 24.5
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9 5
Depreciation 13,425 3.8 14,124 4.7
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46,753 3.7 44,287 4.4
a321,42
OPBIT 55,557 15.8 76,665 25.5
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25.2 202,61
8
20.1

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Interest 1,951 0.6
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1,209 0.4 6,843 0.5 5,415 0.5
OPBT 53,606 15.2 se 75,456 25.1 314,58 24.6 197,20 19.6
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Other Income 29,909
rt he 8.5 26,605 8.9 106,24
4
8.3 90,901 9.0

s fo
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ent
Non-op Income 6.5 17,897 6.0 65,425 5.1 38,959 3.9
Extraordinary Income/Expensesnt
i s co - 0.0 - 0.0 - 0.0 - 0.0
PBT
Th 76,423 21.7 93,353 31.1 380,00
8
29.8 236,16
3
23.5

Total Tax 21,147 6.0 26,203 8.7 98,759 7.7 62,379 6.2
Current tax 23,348 6.6 22,532 7.5 93,898 7.4 62,571 6.2
Deferred taxincluded in interim sector aggregate
Companies -2,202 -0.6 3,671 1.2 4,861 0.4 -193 -0.0
FBT - 0.0 - 0.0 - 0.0 - 0.0
Net
Coalprofit
India Ltd.-(Consolidated) 55,276 15.7 67,150 22.3 281,24 22.0 173,78 17.3
9 4
Nos. of companies 1 0.0 1 0.0 1 0.0 1 0.0
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