Coal India: Higher capex on non-core operations seen as a drag on cash reserves

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Kolkata: A sharp rise in planned “non-core” capital expenditure by Coal India Ltd (CIL) has left analysts wondering if the coal miner is on the right track.

In an analysts’ meet last week, the company said it has allocated Rs15,000 crore in capital expenditure for this year. Out of this, Rs8,500 crore will go into core operations—expanding and upgrading its mines—which is 9.5% more than last year.

The rest Rs6,500 crore—a sharp 28% higher than last year’s allocation—is for non-core operations, or new initiatives. These include setting up wind and solar power plants, building a 1,600-megawatts (mw) thermal power plant, equity participation to the extent of 30% in four fertilizer units and setting up a facility to turn coal into liquid hydrocarbons.

Analysts are of the view that the new initiatives will be a drag on CIL’s cash reserve at a time when its cash flows are under pressure, and that the miner may end up investing in businesses in which it does not have core competence.

CIL will be better off improving efficiency, former chairman Partha S. Bhattacharyya said.

The miner’s dividend paying capability will be impaired by “one-way increase in cost structure and (the) planned capital expenditure,” ICICI Securities Ltd said in a 5 June research report, expressing concerns about its large outlay for “unrelated investments”.

“It is strange CIL is looking to build new thermal power capacity when existing plants are struggling to sell power,” said Bhattacharyya.

Capacity utilization of thermal power plants has dropped from 79% in 2007-08 to 60% in the year to March, Bhattacharyya said, quoting data from the Union government. Instead of creating new capacity, CIL should focus on policy advocacy to improve utilization of existing thermal power plants to 85%, according to Bhattacharyya.

The additional power generated, if capacity utilization can be pushed up to 85%, will cost Re1 per unit less than the going tariff for solar power, he added.

A key official at CIL said the company is looking to build a power plant at Talcher in Odisha to address the problem of evacuating coal from the mines of Mahanadi Coalfields Ltd, a subsidiary. Three train tracks are also being laid, but they will only partly mitigate the problem, this person added, asking not to be identified.

Two CIL subsidiaries have started to set up solar power plants in Madhya Pradesh and Chhattisgarh to generate 200MW each, but analysts are sceptical about CIL’s plans to invest in renewable energy.

“Though it is established that renewable is the future, CIL doesn’t have core competence in producing wind or solar energy,” said an analyst with a leading broking firm, who asked not to be named.

Antique Stock Broking Ltd said in a 5 June research report that considering the pressure on CIL’s core business, the planned capital expenditure in the new initiatives may not materialize at all in the near term. Last year, CIL budgeted for a capital expenditure of Rs5,069 crore on new initiatives, but didn’t spend much on anything, according to the CIL official cited above.

In fiscal 2017, tepid demand for coal led CIL’s net profit to plummet by Rs5,000 crore, or 35% year-on-year, to Rs9,265.98 crore on a flat revenue of Rs89,323.73 crore.

The company recently said coal sales by volume in the first two months of the financial year at 91.7 million tonnes was 4% higher than last year, but 9% lower than its own target for the current year.

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