Coal India: Black Gold

Coal mining in India has a long history—it started back in the 18th century when small private companies began digging for coal. But mining was scattered, unorganized, and production was limited. As India moved toward industrialization and the demand for electricity kept growing, coal became the backbone of progress.

Realizing the importance of energy security, the Government of India decided to step in. In the early 1970s, it nationalized the coal mines to bring them under one umbrella. The idea was simple: improve efficiency, boost production, and make sure power plants had a steady supply of coal.

This move eventually gave birth to Coal India Limited (CIL) in 1975, a state-owned company that went on to become the world’s largest coal producer. 

CIL operates through 85 mining areas spread over eight provincial states of India. CIL has 310 working mines of which 129 are underground, 168 opencast and 13 mixed mines. CIL further operates 13 coal washeries. The Company produces non-coking coal and coking coal of various grades for diverse applications. Most of the coal production is from open cast mines. Others include cement, fertilizer, brick kilns and a host of other industries.

Starting from a production of 79 million tonnes in 1975, Coal India Limited has grown to become the nation's largest coal producer, achieving a record-breaking 781.06 million tonnes in 2025. 

Let's talk about Coal

Many people dislike coal. Why? Because when it burns, it releases carbon dioxide (CO₂), a greenhouse gas. CO₂ traps heat in the atmosphere, increases global temperatures, and contributes to climate disasters. If coal causes so much harm, why do we still mine and use it? Shouldn’t we stop using coal altogether?

To answer that, let’s look at where coal is actually used.

More than 75% of coal is used for electricity generation, around 5% for steel production, and another 5% for transportation. Clearly, the biggest problem lies in power generation. If we want to reduce coal usage, electricity is where we need to start.

Ideally, we want to switch to 100% clean energy from the sun and wind. But the reality is—it cannot happen. Here’s why, in simple terms:

India gets 71% of its electricity from coal today. Coal plants make 1,331 TWh of power every year, while solar and wind together make only 227 TWh. This is like having 7 out of 10 light bulbs powered by coal.The government is still building more coal plants because people need more electricity. They plan to add 80 GW more coal power by 2032. You cannot just switch off these expensive coal plants that cost billions of dollars to build.

The biggest problem with solar and wind is they don't work 24 hours a day. Solar panels only work when the sun shines. Wind turbines only work when wind blows. But people need electricity all day and night.This creates a big problem called the "duck curve." During the day, solar makes too much power when people don't need it. At night, solar stops working but people still need electricity. This makes it very hard to balance the electricity system.Coal plants can run anytime we want them to. We can turn them on and off as needed. Solar and wind cannot do this.

To use 100% renewable energy, India needs huge batteries to store solar and wind power for when they don't work. But India doesn't have enough batteries.The government wants only 13,200 MWh of battery storage by 2028. This is very small compared to what India needs for 100% renewables. Building enough batteries would cost hundreds of billions of dollars.

Building enough solar and wind farms needs huge amounts of land. Solar power needs 20 square kilometers for every 1,000 MW of capacity. Wind farms need even more total area.For 100% renewables, India would need 50,000-75,000 square kilometers just for solar panels. This is bigger than some Indian states. Most solar projects today are built on farmland, which reduces food production.Getting this much land is very difficult because:

Farmers don't want to sell their land.

India needs land for food production.

Land prices are very high.

Legal processes take many years.

So, in conclusion coal has to stay and if coal has to stay coal india has to stay.

Revenue growth:

India needs to triple its electricity by 2035. Coal remains India's biggest electricity source. Coal makes 71% of India's power today. Even with more solar and wind, coal will still make 50% of electricity by 2035.

Coal generation will increase, not decrease. Coal made 1,332 billion units in 2024. It will make 1,890 billion units by 2035. That's 42% more coal power than today.Coal's share falls but total amount grows. While renewables grow faster, coal still grows because total demand is huge. It's like a smaller slice of a much bigger pie. More electricity demand = More coal demand. 

India’s total coal demand is projected to rise from about 1,270 million tons today to 1,900 million tons by 2035. That’s nearly a 50% increase in just 11 years.

This growth aligns with Coal India’s future production plan, which targets an expansion in output from 781 million tons to 1,227 million tons over the same period. At this scale, the company could generate revenues of around ₹2,20,000 crore.

EBIT Margin:

The company currently has an EBIT margin of 32%, which is highly impressive. This strong profitability is driven by its exceptionally high gross margins of around 90%. Over the long term, the company is well-positioned to sustain an EBIT margin of around 30%.

Reinvestment:

Expanding production from 781 million tonnes to 1,227 million tonnes will require reinvestment of around ₹70,000 crore.

Risk/failure Rate:

The Coal and Related Energy sector has an unlevered beta of 1.24, which is a bit surprising for me. Coal is not a discretionary product, the companies don’t carry heavy fixed costs, and they have good gross margins. I expected the beta to be below 1, but I’ll go with the global average of 1.24.This gives a cost of equity of 13.18%.

The interest coverage ratio is very high at 48, so the cost of debt is low at 5.26%.

Overall, the cost of capital is about 12.89%, and the chance of failure is almost zero.

DCF valuation:

Company is currently trading about 40% below its fair valuation. I believe this discount is largely due to ESG concerns, as many investors are selling fossil fuel companies and shifting their capital toward renewable energy. Because of this, there is a possibility that Coal India may continue to trade at an undervalued level for a long time. However, there is also a chance that the market will eventually recognize the company’s strong cash generation and correct this mispricing.

Data/Spreadsheet:

Coal India DCF Valuation Spreadsheet