From a loss-making and trade union-controlled public sector mammoth to a company on its way to be listed, Coal India Ltd (CIL) has come a long way. In an interview with Jyoti Mukul, chairman Partha Bhattacharyya sees a huge upside for the company in the coming years, even as he justifies selling coal cheaper than the international price. Edited excerpts:
Though CIL is now a profit-making company, it was always perceived as a loss-making government enterprise. How far has this perception changed and does it give you the comfort of tapping the capital market?
We used to incur losses in the initial years. The root cause can be traced to when CIL was formed. That was the early 70s, when we had the oil price shock. The country needed more energy options. A high-powered committee was formed under Planning Commission member Sukhamoy Chakravarty. Coal was identified as the main energy source. The Indian economy was aspiring to grow somewhere around five per cent and the energy elasticity of GDP (gross domestic product) was around 1.1 per cent.
For the economy to grow at five per cent, you required energy inputs to come at 5.5 per cent incremental. The coal sector had to grow at more than five per cent but it was growing at 1.8 per cent. There were no investments coming because prices were not remunerative enough but a price increase to that order was socially and politically not feasible. The only way to grow was to channelise public funds by keeping financial viability at bay.
The phase of coal at any cost continued from 1975 to 1991. India was not the only country where such a thing was done. Germany did the same thing. Immediately after CIL was formed, it was appreciated that workers were getting a pittance and there was a 80 per cent wage hike. We had 670,000 people working at that time, producing only 75 million tonnes. The clear signal was, do not bother about losses. So, Coal India was born sick.
How did things change?
With all credit to the company, the growth rate was reversed from a mere 1.8 per cent in 1975 to 5.3 per cent during 1975-1991. In 1991, things changed. The country ran out of resources. When the government decided to withdraw, the company had a serious balance sheet problem. It had Rs 2,500-crore accumulated losses. Equity was eroded. Loan and interest of about Rs 2,225 crore to the government were in default as on March 31, 1992. But, the government became pragmatic in pricing. It allowed the ministry of coal to reset prices annually, according to a formula. Prior to it, prices were approved by the Cabinet.
The management decided, we will not incur any investment which did not give at least 16 per cent return at 85 per cent capacity utilisation. It also decided that we will not allow any debt default. From 1991-92, we were able to make profit because of pragmatic pricing.
Armed with the two decisions, we approached the government on accumulated losses. In February 1996, capital restructuring was done. The government waived part of the interest and loan and converted Rs 904 crore Plan arrears to preferential equity. Once restructuring was done, we got access to financial markets. Since 1996-97, Coal India has been making Rs 1,000-plus crore profit. In the 9th Plan, we consolidated but the demand did not materialise. International crude prices fell and import duty on coal was brought down; we were priced out. In the 10th Plan, the production increased to 81 million tonnes because of the capacity we created. Debt as a percentage of total capital came down from 60 per cent in March 2002 to below 10 per cent in March 2007. My coal was priced cheap and yet we paid the government Rs 17,000 crore as tax, dividend, debt service in the 10th Plan.
Are you comfortable enough to go to the capital market?
We are a financially viable company. We have 30 per cent operating margins. We are selling coal at 50 per cent of current world prices, insulating customers from volatility of coal prices. Not allowing anybody to bleed—neither the coal companies nor the government. No coal bonds.
Once you are a listed company, you have to be transparent and give back value to your shareholders. How long can you continue pricing coal at 50 per cent of the market value?
We currently have one shareholder and we are not unfair to it. While I price my coal less, it is a fact that our coal is not comparable in quality to international coal—it has low calorific value and is not consistent in quality. As we go into washing, we will be producing 350 million tonnes washed coal (annually) by 2016-17 which will be 50 per cent of the total production. It will be comparable to Indonesian quality, with 5,000 kilocalorific value. My average price of thermal coal is $20. After washing, it will be around $26 but I will create a commodity that is comparable to international quality, maintaining my margins. Even after a discount, I can price it at $30, compared to $45 internationally.
Aren’t the prices still controlled?
There is no control. We feel, as part of corporate governance, that this commodity has wide ramification. It is just that any increase has to be in consultation with the government. We have never been denied a price increase. We are not bound to sell coal at high prices. There is nothing wrong in selling cheap. It is important to keep your end-users competitive.
Do you have an advantage as a monopoly?
There are a large number of captive blocks and some of them aspire to be of the size of one of our subsidiaries. That is good. We are a major player. There is no benefit of monopoly that we have taken. Post-deregulation, our pricing policy has been extremely responsible. Twenty nine per cent of our energy basket is oil and to provide it cheap, everybody bleeds but here, 42 per cent energy is being provided without anybody bleeding.
Coal reserves will be taken into account while valuating the company. How realistic are your reserve estimates?
We are sitting on proven reserves of 63 billion tonnes, of which 70 per cent is recoverable. We have engaged technical consultants, since that is a requirement for the US market. The next largest company with mineable reserves is Peabody, which has reserves of 9 billion tonnes. Chinese company Schewa, with the highest market capitalisation of $87 billion among coal companies, has reserves of 6.8 billion tonnes. Valuation is not really dictated by reserves but by profitability. The price/earning multiple in coal mining varies 12-15 per cent, except for Chinese company Schewa, which has 60 per cent. My PAT (profit after tax) last year was Rs 8,312 crore. One way of valuing is, multiply it by a factor.
Second, there is a huge upside that can be captured once we get into washing. Third, we have a large number of small mining reserves. The share of these mines was 90 per cent at the time of nationalisation. Today, it is eight per cent and those mines are getting phased out and as this happens, manpower will be available for redeployment. Manpower was earlier 580,000, now it is 400,000 and yet I increased my production by 150 million tonnes. This process will continue for another 10 years, when I see my manpower at less than 3,00,000, whereas production will grow from the current level of 430 million tonnes to 700 mt. That is my huge upside.
Market experts say PSU offers have not done well since these were aggressively priced. Given the market response, do you think the government should wait for some more time for the CIL offer?
The issue is not about waiting but pricing right. Discount something, but don’t discount totally. Post listing, the scrip should move 10-15 per cent more than the listing price. If that happens, we are happy. These are national assets. You should not sell them cheap.
