Author: Thyagarajan

Coal India Limited (CIL) faces headwinds from different quarters. Production targets have gone awry and the impasse over fuel supply agreements with power companies continues. Amidst all this, the coal behemoth has digested a 25% wage hike in February this year even though its attempts to effect a price hike have met with stiff resistance from key customers.

Coal India [stockquote]COALINDIA[/stockquote] sells coal at a discount of up to 78% to imported Indonesian coal, giving it solid headroom to raise prices. It sells 83% of its coal at the notified price under the fuel supply agreement (FSA) and 11% of its total production through e‐auction, which is priced up to 30% higher than the notified price. Regulated sectors such as power utilities, defense, railways and fertilizers receive their quota through the FSA. 

In line with international pricing mechanism, CIL migrated to a new system for pricing its non-coking (NC) coal on the basis of Gross Calorific Value (GCV) of its various grades of coal from January 01 this year. Earlier, it priced its NC coal under the Useful Heat Value (UHV) based method.

Non-coking coal is mainly sold to power companies. By raising prices, CIL hoped to offset the impact of wage hike to its over 3.65 lakh employees that would entail an outgo of over Rs 6,500 crore.

But within a month, it had to roll back the price hike under the new mechanism due to stiff protests from consumers in sectors such as power and cement. The new grading system would have given CIL an additional Rs 6,250 crore annually. Bowing to pressure, the government forced Coal India to put off the price hike and said it would review the new system after three months.

NTPC [stockquote]NTPC[/stockquote], which is Coal India’s biggest customer, has vociferously opposed the switchover to GCV-based pricing saying its input costs would soar. India’s largest power generator has also refused to sign the fuel supply agreement in its present shape.

CIL wades through a critical phase wherein key policy developments relating to coal / power sectors are in the pipeline like setting up of a coal regulator, auction of coal blocks, mining bill, etc.

On the operational front, Coal India’s performance has been sub-par with production languishing at around 430 million tonnes for the last three years. Its inability to raise prices to offset the rise in input costs could adversely affect its EBITDA margins.

If CIL is to increase productivity, then a price hike is long overdue. Customers have a choice- either allow the coal PSU to raise prices and benefit from increased supply or pay through the nose for imported fuel. While CIL’s profitability has got a boost from higher realizations through e-auctions, better pricing power, faster environment/ forest clearances and solution to land acquisition issues is the key to drive profitability and earnings growth going forward.

Coal India Limited (CIL) is at the receiving end from different quarters. While, on the one hand, it is facing the government’s wrath for failing to fulfill the country’s burgeoning coal demand, minority shareholders, on the other side, are crying foul at the lack of corporate governance standards at CIL and its failure to protect their interests.

On Tuesday, the government issued a presidential directive to force CIL to sign fuel supply agreements (FSAs) with power producers to supply as much as 80% of the fuel requirements committed to power plants. Softening the blow, it however, allowed the PSU’s board the freedom to decide on penalty that would be payable in case it breaches the pact.

The presidential diktat was enforced after Independent Directors of CIL’s board, which has been holding discussions for the last few days, put their foot down on committing fuel supplies.

Going by CIL’s current output and ramp-up capabilities, independent directors felt it was impossible for the state-run miner to meet supply requirements and it may have to opt for imports which is a costly affair.

Instead, they questioned the lower price paid by the power sector for coal and suggested that CIL should cut down on fuel supplies to the power sector and sell excess coal through e-auction to augment profitability.

Amidst this furor over fuel supplies, investors are clearly not impressed at the way Coal India is being arm-twisted. UK-based hedge fund and CIL shareholder, The Children’s Investment Fund Management (TCI) has threatened arbitration against the Indian government, alleging that the government was going out of its way to help private power producers by pressurizing CIL.

TCI, which holds 1% stake in the monopolistic miner, has charged Coal India of selling the fuel at a price that’s up to 70% lower than the market price, hurting minority shareholders.

The country’s powerful lobby comprising of Cyrus Mistry, Anil Ambani and other corporates, who forced the government’s hand on Coal India by knocking on the PM’s door for seeking solution to the power crisis, must be relieved as more than 25,000 MW projects will be kick-started. The demand-supply gap for coal, which stood at 84 million tonnes (MT) during FY 2010-11 is likely to touch 142 MT in FY 2011-12.

While the Prez decree will awaken Coal India from its deep slumber and help meet fuel requirements, the government would do well to address some pertinent issues that plague the miner than just issuing diktats. Coal India faces land acquisition problems and delays in environmental clearances due to which several projects have missed deadlines while domestic prices are yet to align with international rates, hurting the company’s profits. To make matters worse, the coal behemoth has almost been headless, critically hampering its decision-making. At present additional secretary in the ministry Zohra Chatterjee is filling the post.

If Coal India is to retain its tag as the darling of D-Street (thanks to its blockbuster listing), the government would do well to address these ‘bitter truths’ instead of just administering ‘bitter pills’.

[stockquote]COALINDIA[/stockquote]