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Published on 29/12/2020 9:23:06 AM | Source: Motilal Oswal Financial Services Ltd

Buy Coal India Ltd For Target Rs.190 - Motilal Oswal

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Exploring new business areas

Looking at solar manufacturing, renewables and aluminum

* Coal India (COAL), in a statement to exchanges, said it intends to venture into three businesses: 1) solar power value chain (ingot-wafer-cell-module) business, 2) new and renewable energy, and 3) integrated aluminum complex.

* While media reports suggest investments of INR1t in relation to the same, our interaction with the management indicates that its investment plans are still in the discussion stages.

* In the press release, COAL said the creation of SPVs for these businesses would be subject to: a) obtaining concurrence from NITI Aayog and DIPAM, b) feasibility studies and business analysis, and c) establishment of financial viability.

* We believe its plans remain at a relatively nascent stage and investments, if any, would likely happen in small steps.

 

Diversifying away from coal

* With the government’s focus on increasing its renewable footprint and push towards an Atmanirbhar Bharat, PSUs such as NTPC and COAL have been looking to diversify away from coal. Concerns over the sustainability of coal and ESG factors have been raised by investors as well. The company has a permanent/contract employee base of ~2,72,000/~71,000. Their possible deployment – if risks to coal significantly heighten – to newer projects could also be pertinent.

* Investments (particularly of the size as indicated in media reports) would likely happen through JVs. This a route well used by COAL in the past and can be crucial given the lack of its implementation experience in the module/renewable business.

* In terms of solar module needs, India is still largely dependent on imports (80-85%). Matching costs globally through local manufacturing would require incentives given the large economies of scale at play globally.

 

Await a clear roadmap

* While the potential investment can be huge, we still await a clear roadmap on its implementation and timelines. This is not the first announcement from COAL with regard to a possible diversification. In the past, it announced plans for: a) fertilizer projects through JVs such as HURL and TFL, and b) MoU with NLC for the setup of solar and thermal projects.

* The JV with NLC (MoU signed in Oct’18; potential investment of INR120- 150b for 3GW solar projects) is yet to take material steps. The HURL fertilizer project (incorporated in Jun’16 at an investment of INR220b) remains under implementation.

 

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