IPO-bound Bharat Coking Coal pins growth on demand from steel sector, but over reliance on power producers to remain

Coking coal is used to make coke, a key input for steel production. This coal sells at a premium to thermal coal, which is burned for heat in power plants and other industries.

"The real value of coking coal is not getting reflected properly in the Coal India valuation. Now, when anybody will purchase the Bharat Coking Coal shares, will become a direct beneficiary of India's steel growth story," Manoj Kumar Agarwal, chairman and managing director of BCCL, said in an interview on Monday.

However, the coking coal mined in India tends to be of significantly poor quality compared to the requirements of steelmakers and what is available in the international market. As a result, most of the coal produced by BCCL ends up with power-producing companies, which use it as a heating material, just like thermal coal, and pay a slight premium for it.

BCCL mined 40.5 million tonnes (mt) of coal in FY25, including small quantities of thermal coal. It expects production to grow to 54 mt by FY30, after a dip is expected in the ongoing fiscal year on account of heavy rains.

"The growth from 40 million to 54 million tonnes will come from the steel sector. Steel sector realization is more, so the enhanced growth will directly give benefit to the shareholder in terms of higher realization and an increase in the Ebitda," said Mukesh Agrawal, director (finance) at Coal India Ltd.

Ash content issue

In FY25, three-fourths of the company's revenues came from the power sector, as per its red herring prospectus. Just 18% of its top line came from steel companies. Amongst its top 10 customers, there was only one steel company—fellow public sector firm Steel Authority of India Ltd (SAIL)—while the remaining were power companies.

The company claims that it will cap its sales to the power sector at the current levels and increase sales to steelmakers. However, the company's own projections say that sales to power producers, which are less remunerative than sales to steel companies, will remain the largest revenue contributor even in FY30, casting doubt on the company's growth story.

"Even by 2030, power companies are expected to account for the bulk of its business, accounting for 30 mtpa (million tonnes per annum) of volume as against total projected volume of 54 mtpa, with a humble increase from the steel sector from current 2 mtpa level to 10 mtpa by 2030," said Suman Kumar, assistant vice-president for metals and mining at brokerage Philip Capital.

"In addition, there are execution risks around the commissioning of washeries. Taken together, these factors do not fully align with the company’s stated growth narrative of being driven solely by India’s rising steel demand," he said.

BCCL's coal has a 39-40% ash content, compared to the steel industry's requirement of 13-14%, and 8-9% ash content in coking coal imported from Australia. Washing this coal in washeries brings down ash content to 18-19%, which is still higher than the requirement of steel companies. However, this coal sells at a significant discount to imported coking coal. Steel companies blend domestic coking coal with imported coal to achieve the required ash content levels and also reduce their costs.

Infrastructure risks

In FY25, BCCL got just over a fifth of its revenues from selling washed coal, which is priced at a premium. The company has provided a capital expenditure guidance of ₹1,000 crore per year over the next five years, a portion of which will be allocated to setting up three coal washeries with a 7 mtpa capacity.

This will help increase sales to the steel sector to 9-10 mtpa from just over 2 mtpa at present.

The management also guided that future capital expenditure will be serviced through internal accruals and projected annual capex plans of ₹1,000 crore.

By 2030, the company also expects to see a reduction of 10,000 employees, bringing the total to 23,000.

The BCCL initial public offering (IPO) opens for subscription on 9 January and closes on 13 January with a price band of ₹21-23. The complete offer is an issue for sale, where 100% owner Coal India will pare a tenth of its stake to raise ₹1,071 crore at the upper end of the price band.