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India is riding on a high growth trajectory, expanding industrially and economically while moving millions of people out of poverty. Despite the advent of electricity more than a century ago, modern India under Prime Minister Modi’s leadership established key last-mile electricity connectivity only in 2019.
However, despite the thrust on transforming electricity supply, India’s per capita electricity consumption remains among the lowest in the world, with vast latent demand and high room for efficiency.
According to the BP Energy Outlook, India’s share of total global primary energy demand is set to double by 2040. Growth is estimated at 100-200%, supported by strong population growth and economic development.
This presents a ripe opportunity for Indian energy companies looking to supply this growing market and secure long-term energy contracts.
Coal India Ltd (NSE: COALINDIA), or CIL, was established in 1975 and is the largest coal miner in the world in terms of volume – mining approximately 606 metric tonnes of coal in FY 2018-2019. With eight wholly-owned subsidiaries in India and a subsidiary for foreign operations, CIL operates 364 mines and accounts for 70% of the power generated in the country.
It is not an exaggeration to state that CIL is synonymous with India’s energy security as it virtually fuels and empowers the power sector of the country.
Long-term outlook for Coal India
The long-term forecast for CIL is extremely bullish. According to BP’s Energy Outlook, Energy Consumption from coal is predicted to grow from 424 million tonnes of oil equivalent (Mtoe) in 2017 to 917 Mtoe in 2040, a staggering growth of 116%.
This is backed up by CIL’s own analysis, which predicts a 7.6% compound annual growth rate (CAGR) up to FY 2024-2025. Although India is a signatory to the 2015 Paris climate accord and has ambitions of generating 175 GW of electricity from renewable sources by 2022, coal will still very much form the backbone of India’s energy security for years to come.
As per the latest financial statements, CIL is operating in an environment of ever-increasing demand for energy and has achieved an all-time high in both gross and net profits.
Risks to the investor
The biggest risk to an investor is the large government ownership in CIL. As of Q1 2019, the Government of India owned 70.96% of the outstanding shares. With the government on a divestment drive to reduce the current account deficit, the share price is expected to come under downward pressure in the short term.
Furthermore, recent rumors that the government is mulling a breakup of the company to enhance operational efficiency coupled with issues with labor relations are currently weighing on the stock price.
In addition, being a government-controlled enterprise, CIL’s corporate mission of generating shareholder value often conflicts with the government mandate of providing social services and enabling employment generation. Coupled with a large unionised labor force, CIL suffers from frequent work stoppages, low productivity, and quality concerns.
But is Coal India a buy?
A holistic overview of CIL seems to indicate that the opportunities far outweigh the challenges. In addition to the power and steel sectors, CIL enjoys a healthy customer base in the form of the cement, fertiliser, brick, kilns, and a host of other industrial sectors, which form the cornerstone of India’s industrial prowess.
Despite record production numbers, CIL can only supply about 84% of India’s coal requirement, thus ensuring room for additional growth. Since its IPO, the company has steadily cut down on manpower while improving productivity.
If the above is not enough to convince you, then maybe the fact that CIL offers a dividend yield of 5.5% might swing it. To me, investing in CIL seems like a no-brainer and a near sure-fire strategy of profiting from India’s exciting growth story.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Saptarshi Datta doesn’t own shares in any companies mentioned.