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Risks to Coal India and India’s Coal
Strategy: No Plan B
Tom Sanzillo, Director of Finance
Institute for Energy Economics and Financial Analysis
New York Society of Security Analysts
November 13, 2013
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Overview
• India’s Coal Plan: Coal India Limited’s (CIL) Role
• Risks to CIL’s Stock Performance
• Risks to India’s Coal Plan
• A cumulative risk scenario
India’s coal plan
India’s Coal Plan
•70% of generation currently from coal
•56% capacity from coal
•Total coal generation estimated to be
flat by 2017, drop to 58% by 2030
•Rapidly rising GDP and electricity
demand requires new coal capacity
Five Year Plan through 2017:
Increased plans for coal sector
Expand Coal
capacity by
69,000 MW
State of India
increase
domestic coal
production
Increase Coal
Imports from 130
mtpa 2013 to 185190 mtpa by 2017
• Assumes rising private sector activity
• 79% of new capacity from coal
• Increase from 540 million tons per
annum (mtpa) to 795 mtpa by 201
• In 11th Year plan India originally
estimated 731 by 2012; reduced target
to 640 mtpa
• Goldman estimates total imports in
Pacific region up 45 mtpa
• India up 60 mtpa offsetting China’s
decline by 60 mtpa
“With the best effort at increasing
domestic production it will not be
possible to meet the increased demand
for coal from domestic production”
(12th Five Year Plan).
Coal India Limited (CIL)’s Role
•
CIL from 435 Million Tons Per
Annum to 615 Million Tons Per
Annum by 2017 (8% growth
estimate, 4.6% achieved during
11th Year Plan)
•
Aggressive foreign acquisitions.
Coal India: risks to stock price
Risk #1: Weak Stock Performance since
2010, continues
Strong start, weak prices
245INR (IPO) to 279INR per share (10/26)
• $5.51 per share in 2010
to $4.54 per share in 2013 – or
an approximate 18% drop
• Rose 40% on initial trading to
$7.80 per share
• Peaked at $9.00 per share in
May 2011
• Down 21% - October 2013 YOY
New sale of stock seeking $1.3 billion
Risk # 2: CIL Shrinking Margins
$30
$25
$20
$15
$10
$5
$0
Revenue $ Per Ton
2011
2012
Cost $ Per Ton
2013 est
Margins
2014 est
Risk # 3: Dysfunctional Pricing
• India Historic Domestic Price: $30 +/- per ton
• India energy adjusted: $26 per ton
• CIL - $19-$24 per ton (2011 –present)
• Historic Import Price: $70+/- per ton
• China energy adjusted: $70 per ton
“Coal prices are theoretically decontrolled,
but in fact they are adjusted only in
consultation with the Ministry”
(Twelfth Five Year Plan, Energy)
Risk #4: More Imports – Upward
Pressure on Coal and Electricity Prices
Risk #5: Shareholder Concerns
• The Children’s Investment Fund (TCI),
shareholder, institutes suit
• CIL selling coal below fair market value prices
• Uneven economic distribution of subsidy
• CIF: A market price is $75-$80 per ton ($50 per
ton higher than current CIL pricing)
• Governance concern
• CIF sold >25% of shares purchased in 2010
Risk # 6: State of India Concerns
“Given the importance of expanding
supply and the indifferent
performance of Coal India in
increasing production, there is need
for inducting private sector
investment in coal”
(Twelfth Five Year Plan, Energy, p. 37)
isk # 7: Is CIL ready for global prime time
•Criminal Indictments
•Coal Reserves Reporting
•Overstaffed
•CIL has 350,000 employees and
produces 400+ mtpa – investor concern.
RiskS to
India’s
Coal
Plan
Risk #1: Slower Economic Growth
• Slowing worldwide GDP growth, more cautious
outlooks— 2013 and beyond
• 11th year plan assumed 9% GDP annual growth
• Achieved: 8.2% GDP annual growth and
electricity growth of 6.4%
• 12th year plan assumes GDP annual growth 9.0%
minimum
• Electricity sector – 8.5% growth
• Current GDP growth for 2013 expected at 4-5%
• Several down grades during year
• Generation growth at 5.7% in 2013, coal
generation up by 4% YOY (Through Sept.
2013)
Risk # 2: Currency and Fiscal Short/Long
Term Pressure on Energy Sector
• Fossil fuel subsidies, including coal, trigger deficit
spending, diminish value of Rupee
• Since 2010, IPO Rupee drops 40%
• Utilities/Government pay for coal in $US and pay for
electricity system in Rupees
• Risks
• Short term deficits
• Medium term recovery - slow
• Long term – fossil fuel subsidies/economic growth,
sustainable
Risk # 3: Upward Coal and Electricity
Prices Needed: Unpopular/Dis-economic?
“Electricity to the consumer is also underpriced.”
“A transition to more rational energy pricing requires
upward adjustment in all these prices.”
“Electricity prices are set by State regulators but
most regulators have shown a tendency to hold back
tariff adjustments, typically under political pressure.”
“Suppressing energy prices will not help.”
(Twelfth Five Year Plan, Electricity Prices)
Risk # 4: Slowdown in Coal Plant Expansions
Massive insolvency of state utilities weakens investment climate
• Annual losses growing at discoms. Current situation “unviable”
Small Developers backing out of new plants
• Prices do not incentivize new power, coal shortages
• Large developers: full hands, empty pockets
• State of India BBB- ( Fitch/SP negative watch)
World Bank and other IFI’s
• Policy to diminish support for coal fired generation
• Support for renewable investment
The negative case of China
• Air pollution
• Can India afford debt of Chinese style coal build out?
Risk # 5: Supply Expansion
International Acquisitions
• CIL’s Mozambique effort
• Owns coal blocks
• Fielding proposals from other African countries
• Private efforts to deliver new reserves from Australia
and United States challenged.
• Australia – in discussion on proposals
• United States – CIL reviewing proposals
CUMULATIVE risks
Cumulative Risk: Will Coal India and coal
strategy be a drag on India’s growth plans?
Coal India
• Failure to raise share value
• Supply problems – performance and reserves
• Shrinking Margins – political revenues and rising
costs of mining
• Dysfunctional Coal Prices – too low, exports
exacerbate economics
• Governance: shareholder concerns
• Low Confidence in Coal India
Cumulative Risk: Will Coal India and coal
strategy be a drag on India’s growth plans?
India Coal Strategy
• Slower Economic Growth
• Impacts on industrial and residential differently
• Supply Problems
• Currency and Fiscal Pressures
• Power Price Dilemma – do rising prices harm a slowing
economy?
• Acquisition Risks
• Slowdown in Coal Plant Expansion – cash strapped
utilities – pull back from coal