Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/CCR AAA/Stable/CRISIL A1+’ ratings on the bank facilities, corporate credit rating and short-term debt of Coal India Limited (CIL).

 

The ratings continue to reflect CIL’s strategic role in helping India meet its energy requirement, its near-monopoly status, healthy profitability and strong financial risk profile. These strengths are partially offset by susceptibility to regulatory risks and socio-political factors, and constraints in the coal distribution and evacuation infrastructure in India.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of CIL and its subsidiaries and joint ventures (JVs) to arrive at the ratings. CIL and all its subsidiaries are together referred to as CIL. This is because all these entities, collectively referred to as CIL, are under a common management and have strong business and financial linkages.

 

Please refer to Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance in meeting India’s energy requirement: Given 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 80% of domestic coal production in fiscal 2022. Total production by the company and offtake during the fiscal were 623 million tonne (MT) and 662 MT, respectively (596 MT and 574 MT, respectively, in the previous fiscal) out of which around 80% of its supplies were to the power sector.

 

• Continued near-monopoly status: CIL possesses 48% of India’s proven reserves in its command area and accounts for the bulk of the domestic coal production. While the government has already started auctions for the commercial mining by private sector players (46 coal mines are auctioned till August 2022 under five tranches since November 2020), implementation is expected to 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 of 623 MT and 662 MT, respectively, and with operating profit before depreciation, interest and taxes (OPBDIT) margin at 23.1% in fiscal 2022, compared with 21% during the previous fiscal, CIL has reported highest ever OPBDIT of Rs 25,481 crore for fiscal 2022.

 

Offtake increased 11% in the first quarter of fiscal 2023, driven by power demand recovery. The OPBDIT margin further improved to 34% from 19% in the corresponding period of the previous fiscal, driven by larger volumes and higher e-auction premiums. With expected improvement in the power demand, volume and profitability should remain healthy over the medium term.

 

• Strong financial risk profile: The financial risk profile is supported by low debt and high networth. Gearing remained strong at 0.08 time as on March 31, 2022 (0.16 time a year earlier) due to easing of working capital intensity during the year.

 

Liquidity remains robust with net cash and cash equivalent (C&CE)[1] of around Rs 32,000 crore as on March 31, 2022 (around Rs 15,000 crore last fiscal). Net C&CE significantly improved during fiscal 2022, as indicated mainly by increase in operating performance and ease of working capital intensity during the fiscal.

 

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 the investments in these sectors have been low till now, since the projects are in the preliminary stages, it may increase with the progress of the projects.

 

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

 

Weaknesses:

• Exposure to socio-political 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 socio-political factors, which mandate development activities in coal mining areas, thereby impacting the cost structure. CIL plays an important role in ensuring the country’s energy security, and domestic coal has a discounted price compared to imported coal. Private players entering the business under the commercial mining route will take time to start production, thus keeping CIL’s near-monopoly status and strategic importance to the Government of India. 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 socio-political factors will impact the business.

 

Furthermore, CIL has large contingent liabilities on account of claims related to environment clearances and taxes. Any materialization 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 35 planned first mile connectivity projects, 6 projects having 82 MT capacity are completed. Out of these, three projects having 52 MT capacity got commissioned during fiscal 2022. Furthermore, CIL is focusing on improving the rail infrastructure in Odisha, Jharkhand and Chhattisgarh with various projects in the pipeline. Some of the rail projects remains very critical such as tripling of the Tori- Shivpur rail line that will increase the capacity to 3 times. 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 cash equivalent less total debt

Liquidity: Superior

Liquidity is backed by net cash and cash equivalent of around Rs 32,000 crore and unutilised fund-based working capital lines of Rs 4,250 crore as of March 2022. The annual cash accrual, existing cash and cash equivalent and unutilised bank lines should be adequate for meeting the debt obligation, capex and incremental working capital requirement during fiscal 2023.

Outlook: Stable

CIL will maintain its position in the domestic coal industry, driven by strong capital structure and surplus liquidity.

Rating Sensitivity factors

Downward factors

•   Any material adverse impact of changes in India's coal policy
•   Significant weakening of financial and liquidity risk profiles
•   Materialisation of contingent liabilities significantly deteriorating the financial risk profile, especially liquidity
•   Any divestment leading to substantial reduction of government shareholding to below 50%

About the Company

CIL was incorporated in 1973 as Coal Mines Authority Ltd after the nationalisation of the coal sector. It was reconstituted as a formal holding company with the present name in November 1975. CIL was conferred the Maharatna status by the Indian government in April 2011. The status provides operational and financial autonomy. Additionally, six of its eleven wholly owned subsidiaries have been accorded the Miniratna status, leading to decentralisation of operations and decision-making. In October 2010, the government divested 10% stake in CIL for Rs 15,200 crore through an initial public offering (IPO). After the IPO, CIL was listed on the domestic stock exchanges. Over the years, the government has divested stake through offer for sale, by way of placement of shares in Central Public Sector Exchange Traded Fund and buyback of shares through offer for sale. Government shareholding was 66.13% as on June 30, 2022.

 

In fiscal 2022 and the first five months of fiscal 2023, CIL produced 623 MT and 253 MT of coal, respectively, against 596 MT and 209 MT, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated)*

As on/for the period ended March 31		2022	2021
Operating income	Rs crore	1,10,509	90755
Profit after tax (PAT)	Rs crore	17378	12702
PAT margin	%	15.7	14
Adjusted debt/adjusted networth	Times	0.08	0.16
Interest coverage	Times	52	29.61

* As per analytical adjustments made by CRISIL Ratings

 

CIL had PAT of Rs 8,834 crore and total income of Rs 36,087 crore in the quarter through June 2022, compared with Rs 3,174 crore and Rs 25,963 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable