Profit down by over 50% in 7 years: Coal India's future looks bleak

Net worth, profits continue to fall as Coal India battles higher wages, rising coal demand

High labour cost, delay in supply chain process and burgeoning cost of opening new mines (due to surging rehabilitation expenses) are threatening to put a dent on the profit of Coal India, which enjoys a monopoly in the sector. 

In January, Mahanadi Coalfields Limited (MCL) — one of the best-performing subsidiaries of Coal India — said work stoppages due to labour unrest at its mines was highest ever in this fiscal. MCL said this led to a production loss of 4.86 million tonnes in the first three quarters of this fiscal year. 

 

During the same period, South Eastern Coalfields (SECL) also saw a tiff with some of its contractors over payment for increasing coal production. MCL & SECL together contribute 50 per cent of Coal India’s production.  

The company’s spokesperson did not respond to emailed queries. 

The labour unrest is taking place despite Coal India approving a wage hike in 2018 and officials blamed the politically influential contractors for the dispute. “The company hires mine workers through third party local contractors who have political strings. Most of the times, they instigate labour unrest for higher wages,” said a Coal India official. The company has seen expenses growing by 4-5 per cent every year due to wage. 

 

CIL has also seen its operational cost spiral due to hike in the cost of rehabilitation. According to the government’s policy, Coal India has to offer compensation and job to a member of the displaced family, mostly non-mining. 

Another challenge faced by the company is evacuation of coal. Three key railways lines from its major mines have not ferried a single kg of coal as they have not been operationalised for close to a decade now. 

Tori-Shivpur-Kathotia, Jharsuguda-Barpali-Sardega and East & East West Corridor in Raigarh, which were to connect North Karanpura, IB Valley and Mand-Raigarh coal fields, would have collectively boosted the supply by 150 million tonnes. IB Valley and Talcher have the highest coal reserves in the country. 

 

The double whammy of delay in supply and higher internal cost has hampered the cash reserves of the company. Its rese­rves and surplus, which are used to fund production, slid 21 per cent in seven years.  

To compare, China Coal Energy Company Ltd posted a revenue of RMB 106 billion (Rs 1.06 trillion) and registered a profit of RMB 4.48 billion (Rs 4,578 crore) for the Chinese financial year ending December 2018. The net cash generated by it is RMB 20 billion (Rs 20,845 crore). 

A company executive said Coal India was “financially vibrant” and can fund expansion through internal accruals. “Coal India is maintaining an internal rate of return (IRR) of at least 12 per cent and has surplus cash,” he said. 

Facts, however, tell a different story. Its wages have been rising every year with mining workforce remaining the same. 

In the last fiscal, the company approved the 10th Wage Agreement, affecting over 300,000 workers across the country with 20 per cent wage hike. As on March 2018, Coal India employees numbered 298,000. 

The company then said, “It is estimated to fetch the company extra revenue of Rs 6,421 crore that would cover an additional outgo of about Rs 5,700 crore. This would be on account of 20 per cent workmen salary hike announced earlier this year and Rs 800-crore annual outgo on account of wage hike of officers.” 

As of FY18-end, its net cash was Rs 32,500 crore (excluding the Rs 10,500 crore cash tied up under escrow accounts for mine closure plan, shifting and rehabilitation fund), said a report by HDFC Securities in January. 

“Coal India's business leaves barely enough cash flow, after paying for capex (with back-end benefits) and dividends,” it said.

To bridge the gap, Coal India passes the cost to power generators, pushing them to pay more. The price of imported coal (FOB Kalimantan 4,200 kcal/kg GAR) has come down to a five-year low of $31.05/tonne (Rs 2,058 per tonne) in January 2019. The company had increased the price of thermal coal (used in power units) by 9 per cent last year. At similar grade as imported coal, domestic would cost Rs 1,024-1,145 per tonne for power units. 

“It is becoming increasingly difficult and expensive to open and evacuate coal from new mines. Such a generous rehab policy, constant pressure for salary increase and slow adaption of technology has made expenses grow faster than revenues,” said Debasish Mishra, leader, energy, resources and industrial products, at Deloitte in India. 

However, the Centre, which has an ambitious plan of electrifying all households, will keep Coal India's business ticking. International Energy Agency (IEA), in its Coal 2018 report, said India would see strong growth in coal demand, while it slows down globally.