Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance in meeting India’s energy requirement: Owing to India's abundant coal reserves and non-availability of other sustainable sources of fuel, coal will continue to play a dominant role in meeting the country’s energy requirement. CIL accounted for 77.5% of domestic coal production in fiscal 2024. The company recorded second year of highest ever production and offtake in fiscal 2024 at 774 million tonne (MT) and 754 MT, respectively (703 MT and 695 MT, respectively, in fiscal 2023), out of which around 82% of supply was to the power sector.

Continued near-monopoly status: CIL has 48% of India’s proven reserves in its command area and accounts for the bulk of domestic coal production. While the government has started auctions for commercial mining by private sector players (92 coal mines auctioned until August 2023 under seven tranches since November 2020), implementation will take longer. Hence, CIL will continue to enjoy its monopoly over the medium term.

Healthy profitability: Favourable geological conditions and improving productivity in terms of output per man-shift through increased outsourcing and capital expenditure (capex) kept the operating margin healthy over the past decade. With highest ever production and offtake and with operating profit before depreciation, interest and tax (OPBDIT) margin at 30.3% in fiscal 2024, compared with 30.1% in fiscal 2023, CIL reported highest ever OPBDIT of Rs 37,369 crore in fiscal 2024.

Offtake increased by 5.6% in the first quarter of fiscal 2025 driven by power demand recovery. While the revenue remained flattish in first quarter of fiscal 2025 in comparison to previous fiscal on account of lower e-auction premium, the OPBDIT margin improved to 39% from 29% in the corresponding period of the previous fiscal owing to lower input cost and reduction in the employee cost. With improvement in power demand, volume and profitability should remain healthy over the medium term.

Strong financial risk profile: The financial risk profile was healthy supported by low debt and high networth leading to a strong gearing at 0.08 time as on March 31, 2024 (same as a year earlier).

Liquidity was robust with net cash and cash equivalent (C&CE)[1] of Rs 43,090 crore as on March 31, 2024 (around Rs 38,700 crore previous fiscal) despite capex of nearly Rs 23,475 crore in fiscal 2024.

CIL will undertake annual capex of Rs 15,000-20,000 crore over the next three fiscals to increase mining and coal washing capacity and improve rail infrastructure. The company also plans to set up solar power and thermal power plants and revive fertiliser plants. While investments in these sectors have been low, since the projects are in the preliminary stages, it may increase with the progress of the projects.

Despite the proposed capex and continued dividends, the financial risk profile and liquidity will remain strong over the medium term, backed by robust capital structure, sizeable liquid surplus and healthy cash accrual. Larger-than-expected capex, adversely impacting cash position, will remain a key monitorable.

Weaknesses:

Exposure to sociopolitical and regulatory risks: Despite improving productivity, CIL’s coal output has been constrained by delays in obtaining environmental and forest approvals, especially in greenfield projects and lack of adequate logistic infrastructure. Flexibility is also restricted by sociopolitical factors, which mandate development activities in coal mining areas, thereby impacting the cost structure. The company plays an important role in ensuring the country’s energy security, and domestic coal has a discounted price compared with imported coal. Private players entering the business under the commercial mining route will take time to start production, keeping CIL’s near-monopoly status and strategic importance to the government. Operational flexibility has improved in the past few years with environmental and forest clearances enabling faster implementation of stuck projects for coal evacuation. Any change in the regulatory regime or sociopolitical factors will impact the business.

Contingent liabilities on account of income tax claims have significantly reduced this year; however, materialisation of these contingent liabilities leading to cash outflow will remain a key rating sensitivity factor.

Constraints in coal distribution and evacuation infrastructure: In the past, volume was hit by shortage of adequate rakes for transportation of coal and lack of last-mile connectivity in pitheads. Nonetheless, there has been progress in implementation of previously stuck projects, with better coordination among stakeholders. Out of 75 planned first mile connectivity projects, 15 projects have been commissioned and 18 are expected to be completed in fiscal 2025. Furthermore, CIL is focusing on improving the rail infrastructure in Odisha, Jharkhand and Chhattisgarh with various projects in the pipeline. Overall, these projects will ease evacuation constraints and increase the share of railways in transporting coal. Any delay in the completion of these links may impact the offtake.

[1]Net cash and cash equivalent is equal to cash and equivalent less total debt