Away from the thunder of the ‘Coalgate’ controversy, India’s national miner, Coal India Ltd (CIL), is quietly staging a recovery.
For a company which reported a mere 4.5 million tonne (mt) increase in production in the last three years, CIL’s promise to produce 29 mt more coal in this fiscal appeared tall.
Nearly half way through the year though, the target appears within reach. CIL has already produced 12.25 mt more coal when compared with the same period in 2011.
On a year-on-year basis, production grew by a robust 7.6 per cent to 195 tonnes so far, against the annual growth target of 6.6 per cent.
And, since the second half has always been more rewarding, contributing nearly two-thirds of annual production, the miner is confident of reaching the targeted 464 mt mark without any blips by March 2013.
“Considering that mining activity generally remains subdued in the first half of the fiscal, especially in the second quarter, we haven’t done badly,” says Chairman and Managing Director Narsing Rao.
Availability increases
Incidentally, CIL’s production was down by 10 mt during April-September 2011, reportedly due to heavy rains and flooding of mines. What affected the industry the most was a drop in offtake or despatches.
Assuming charge nearly five months ago, Rao, therefore put in great effort to persuade the railways to get more rakes. The strategy paid off in improving the offtake by 6.4 per cent in the April-June quarter.
Though the heavy rains impacted despatches in July-August; as on September 12, CIL fed the country with 11.25 mt more coal, 6.2 per cent higher than last year.
As the rains have now subsided, Rao is hopeful to end the first half with higher growth in offtake.
Challenges ahead
But that brings the company to the bigger challenge – maintaining growth in the second half of the fiscal, when the railways get busy transporting food grains.
Traditionally, despatches for Coal India lag behind production during this period leading to piling up of pit head stock, which touched 71 mt in 2011-12.
But this year the company intends increasing net availability of coal by 37 mt, enough to fuel 7,400 MW of power generation capacities.
“It will be a challenge,” Rao agrees. But, he is determined to find a way out.
Profitability to increase
But, producing more coal is perhaps easier than keeping the company’s shareholders happy.
The company’s stock fell to Rs 300 in December 2011, in the face of dwindling production, the Government’s restrictions on selling coal through a highly profitable e-auction route, and last but not the least, a huge 50 per cent wage hike demand from nearly four lakh workers.
The workers finally agreed to smoke the peace pipe at a 25 per cent hike effective from July 1, 2011, making the company poorer by nearly Rs 6,000 crore annually.
The additional wage burden sent CIL’s net profit down by 5 per cent in the January-March 2012 quarter.
Though Rao and his team were successful in regaining investor confidence by posting an 8 per cent rise in profit after tax to Rs 4,469 crore in the first quarter; escalating costs brought the operating profit down by over 2 per cent.
The Rs 75,000-crore turnover company always received help from an ‘other income’ component in the form of fixed deposit earnings (on a mammoth Rs 58,000-crore cash reserve) and e-auction revenues to boost profit growth. But, a further squeeze in operating margin was a cause of concern.
Because, under pressure from the Government to enter fuel supply pacts (FSA) with generation utilities commissioned after March 2009, CIL is diverting its incremental production to the power sector, for which coal prices have largely remained the same for the last three years since October 2009.
While power (also fertiliser and defence) enjoyed a preferential treatment on the ground in that its end product (electricity) prices are regulated; it was the non-power segment (like steel, cement, aluminium), which bore the brunt of two rounds of wage hikes by CIL in the interim period.
Coal prices were raised by 30 per cent for the non- power segment from February 2011.
Price hike
To cut a long story short, the focus on power sector consumers would reduce the proportion of sales to the more profitable non-power segment from 30 per cent to nearly 27.5 per cent of total sales.
The shift in sales pattern, coupled with wage hike and the cap on e-auction offerings at approximately 50 mt should keep up pressure on CIL’s profitability.
Experts, however, argue that an 8.5 per cent targeted rise in offtake in 2012-13, should bring home a net benefit.
But, should the company consider a price hike, especially for power producers, as a logical solution to ensure profitability?
Rao refused to comment.
Sources, however, rule out the possibility of a price hike, at least in this fiscal.
CAG and production outlook
The recent report by the Comptroller and Auditor General indicated that the redistribution of CIL reserves from captive users should impact the company’s production, from end of the Twelfth Plan (2012-17) period.
Insiders, however, predict that the impact should be delayed by another five years.
For the moment, the company managers are busy in monetising the available assets to the fullest.
The priority is to work upon the rehabilitation and resettlement schemes to resolve land disputes and scale up production of large assets like Gevra (35 mt) and Kushmunda (15 mt) in Chhatishgarh to 50 mt each.
On the cards is appointment of mine developers and operators for 15 identified assets to produce 50 mt in five years for which the draft tender document is nearing finalisation.
“We hope the tender would attract miners from overseas,” says an official.
Also a priority is to ensure ‘evacuation solutions’ to monetise assets such as Amrapali and Magadh in Jharkhand which have environment clearance to produce nearly 30 mt of coal but is lying unutilised for want of a railway line.
“We are planning road transportation facilities to start mining at Amrapali,” says Rao.
Of course, Coal India is one of the most cash-rich public sector units that are now on the Government’s radar.
Promises from the Government that it would do its best to speed up capex plans of behemoths such as Coal India should augur well for it.