What If Coal India Becomes a Lithium Stock?

A potential Game Changer for India’s Mining Giant

The Indian government’s push for renewable energy is rapidly gaining momentum, creating significant opportunities for companies directly involved in the sector, such as Suzlon Energy, Inox Green Energy, and Inox Wind. However, this impact extends beyond these direct players, affecting companies like Coal India, which indirectly contribute to achieving ambitious clean energy targets.

After a stellar 149% rally in its share price over the past year, Coal India’s performance in 2024 has been relatively muted. But the tide seems to be turning, with the company's share price surging an impressive 13% in the last five days.

Let’s investigate the forces driving Coal India’s recent rise and explore what could happen if it ventures into lithium mining.

Strong Financial Performance

In FY24, Coal India’s net profit soared to Rs 3 billion, a 109.8% jump compared to FY23’s Rs 1.4 billion. This surge was fueled by a near doubling of the net profit margin, which climbed from 3.5% to a healthy 6.5%.

A significant reduction In finance expenses played a key role in this profit leap, with interest expenses dropping to Rs 3.6 billion in FY24, compared to Rs 4.1 billion the previous year. The company’s revenue also enjoyed a healthy uptick, reaching Rs 46.3 billion, reflecting a 15% year-on-year (YoY) increase.

This impressive growth is likely a result of the rapid influx of new orders Coal India secured throughout FY24. By the end of the financial year 2023-24, the company’s order book was valued at a staggering Rs 186.6 billion.

Government Initiatives Drive Growth

Coal India is well-positioned to capitalize on the Indian government’s continued emphasis on infrastructure development. The significant budget allocation of Rs 111.1 billion in the FY25 interim budget bodes well for increased opportunities in the company’s core sectors.

For example, the government’s focus on significantly increasing hydropower capacity, with a target of at least 50% in the next decade, presents a golden opportunity for the company. Additionally, the government’s push for pumped storage projects (PSPs) to integrate renewable energy and manage peak power demands aligns strategically with Coal India’s capabilities.

The Potential for Lithium

India is a net importer of critical minerals, so in a bid to boost domestic mining, the government passed the Mines and Minerals (Development & Regulation) Amendment Bill in 2023. This bill introduced exploration licenses for critical minerals. In June 2023, the Ministry of Mines listed 30 minerals critical to India’s economy, with lithium among the highest in demand due to its use in batteries for mobile phones, electric vehicles, and grid-scale storage systems.

The Geological Survey of India (GSI) found lithium reserves of about 5.9 million tonnes in Jammu & Kashmir, with more reserves discovered in Chhattisgarh, Rajasthan, and Jharkhand. While some of these blocks have been put up for auction, the response from private sector miners has been lukewarm, suggesting a government-backed entity like Coal India might lead the lithium mining megatrend.

Coal India needs to prepare for the transition from fossil fuels to green fuels. Its diversification plans span multiple segments, including renewable energy, thermal power, coal gasification, coal bed methane (CBD) projects, as well as fertilizer and aluminum businesses.

There is immense opportunity in diversification towards critical minerals, as seen in countries like Australia and China, which have rapidly ramped up production. Coal India is looking to undertake projects in rare earth mines and is expected to lead lithium mining after the J&K mine auctions. The company is also exploring acquisition opportunities for critical mineral mines abroad.

Challenges and Considerations

Despite Coal India’s potential, predicting success in mining lithium is a challenge. India’s lack of domestic availability of world-class deposits of critical minerals like lithium, nickel, and cobalt remains a concern from an energy security perspective. Further, the technology to extract lithium from clay deposits, as found in Jammu & Kashmir, is not yet proven commercially.

While Coal India’s balance sheet and profitability have been stable for over a decade, aiding its ability to bid and win projects, the near-term trajectory of the stock warrants caution. Investors should remain vigilant and consider the risks associated with Coal India’s diversification into critical minerals.

Conclusion

Coal India is well-positioned to benefit from tailwinds in infrastructure and renewables. Their ambitious plans and debt reduction efforts paint a promising picture. However, ongoing project controversies and high debt levels are causes for caution. If Coal India successfully transitions into lithium and critical minerals mining, it could become a significant player in India’s energy transition.

For now, the valuations of the stock seem to be factoring in too much too soon, and the near-term trajectory of the stock warrants careful observation.

Disclaimer: FinBrook provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.