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Nevertheless, CIL has been trying to ramp up production in the domestic market, but so far it has fallen short of its production targets. (Santosh Sharma/Mint)
Nevertheless, CIL has been trying to ramp up production in the domestic market, but so far it has fallen short of its production targets. (Santosh Sharma/Mint)

CIL: limited impact from FDI in coal mining, stock may take time to recover

  • Low domestic coal prices are a reason why foreign firms may not find mining that attractive at this point
  • International coal prices have fallen by 20-30% in the past year

Coal India Ltd (CIL) seems to be in a quagmire. The government’s move to allow 100% foreign direct investment (FDI) in coal mining has dented the market’s enthusiasm in the stock. Its shares tanked 3.7% after the announcement. That said, the stock has been sliding since June 2019 and is near its all-time low now, despite having what can be said to be a decent dividend yield.

FDI is not the only concern though. International coal prices have fallen by 20-30% in the past year, note analysts. Both low realizations and the 100% FDI in coal mining are seen as factors that could keep domestic coal prices under pressure, going forward.

However, that might not be the case. Domestic coal prices are already quite low than landed prices. Besides, CIL’s realizations from fuel supply agreement sales are about 37% lower than e-auction realizations. Additionally, low domestic coal prices are a reason why foreign firms may not find coal mining that attractive at this point, noted analysts.

“Even after international prices coming off 20–30% over the past one year, e-auction prices are still at a discount of 20–30% to the landed price of imports from Australia. Additionally, compared to the price of Indonesian coal (4200kcal), e-auction prices are at only 4% premium. Hence, we expect returns for any international players to be stretched, and profitability constraint to not to attract meaningful investments," said analysts at Edelweiss Securities Ltd in a note to clients.

Additionally, inadequate infrastructure and issues regarding land availability may take a while before 100% FDI production kicks off. To top it, bidding and environmental clearances will take some time before the first commercial production from newer mines sees the light of the day.

Besides, as India is an importer of coal, the new domestic production that comes in due to 100% FDI is expected to first cover the production deficit in the domestic market. “Any new commercial coal production will first cater to this gap in domestic supply through import substitution. Also with 3-5 gestation period for new mines and the normal 3-5% growth in coal demand will create a further cushion of import substitution. Hence, we find limited risk to CIL e-auction volumes," said JM Financial Institutional Securities Ltd in a note to clients.

Nevertheless, CIL has been trying to ramp up production in the domestic market, but so far it has fallen short of its production targets. This is also weighing on its stock. However, the stock is available at a dividend yield of about 7%, and that could be a consolation for investors.

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