Coal India posted a 68 per cent rise in profits in the first half of current fiscal (ended September) on the back of delays in new projects and a 12 per cent decline in production. What can explain this curious phenomenon?
On November 12 last year, analysts and economic pundits tracking Coal India Limited (CIL), the world’s largest coal producer, got the shock of their lives. India’s state-owned miner had posted a whopping 68 per cent jump in net profits for the half-year ended September, 2011. This, even as historic delays in approvals for new projects—that had led to flat production in previous fiscal (2010-11)—had gotten only worse in the first half of the current financial year. In fact, production in the six-months period ended September was down 11 per cent, declining for the first time in the company’s history.
The Bombay Stock Exchange (BSE)-listed company produced 431 million tonnes of coal for the 2010-11 fiscal year, same as the previous fiscal’s output, but posted a 12.9 per cent jump in net profit of Rs 10,867 crore. Between April and September, 2011, however, the company sold 176 MT coal, a 11.5 per cent decline as compared to same period last year but net profit surged as much as 68 per cent to Rs 6,737 crore.
To add to the mystery, a closer analysis of the company’s balance sheet further reveals that the entire benefit from the increase in the notified price of coal in February last year was swallowed up by the increased cost of production. That the company still managed to outgrow the negative impact of the historic dip in production, and that too by a huge margin, was nothing short of magic.
So, what explains this Houdini-like trick in increased profit growth for Coal India—a Maharatna Public Sector Undertaking (PSU) which alone meets over a half of the energy demand of Asia’s third-largest economy?
Windfall with e-auctions
The first part of Coal India’s winning strategy is to garner maximum possible revenue from spot sales of coal e-auctions, where prices go up by an average of 60 to 70 per cent over the government-dictated notified price of the commodity.
Data reveals that the contribution of spot sales of coal in CIL’s overall revenues has seen a sharp rise from 11.9 per cent in 2007-08 to 17.5 per cent last financial year, even as its contribution to overall volume of coal sold remained stagnant at 10 per cent over the four-year period. This is a result of an over 37 per cent jump in the average sale price at e-auctions, from Rs 1,346 per tonne to Rs 1,846 per tonne during the same period, thanks to historic coal shortages which marked this four year phase, forcing buyers to opt for the costly e-auction of coal.
Last financial year (2010-11), coal was sold in e-auction by CIL at a staggering 81 per cent over the average notified price of Rs 920 a tonne. E-auction coal had fetched a premium of 63 per cent over the same average notified price in 2009-10. The higher realisation from selling coal at market price explains the last year’s 12.9 per cent jump in net profit. E-auctions accounted for Rs 8,810 crore or 17.5 per cent of overall sales of Rs 50,233 crore.
Even in the first half of the current financial year (2011-12), e-auctions contributed over 17 per cent of the miner’s revenue as compared to less than 10 per cent registered during the same period, last fiscal. E-auction’s contribution to overall volume of coal sold, as always, remained stagnant at around 10 per cent. While it might appear that the same strategy was at work this time last year, the devil, again, is in the details. The first half of the current fiscal was marked by a decline in production for the first time in company’s history. Also, the notified price—which works as the floor price at e-auctions—was itself increased to Rs 1,600 per tonne from Rs 920 per tonne last year in February. This should ideally have made e-auctions less remunerative. Yet, that wasn’t the case.
On the contrary, revenue from e-auctions registered a whopping 68 per cent jump from Rs 3,664 crore between April and September last financial year (2010-11) to Rs 6,134 crore during the same period this fiscal. This is a result of the skyrocketing average sale price at e-auctions which doubled from Rs 1,808 per tonne to Rs 2,693 per tonne during the initial six months of this fiscal, thanks to historic coal shortages during this period.
Between April and September this financial year, the company sold 176 MT coal, a 11.5 per cent decline as compared to same period last year. Of this, 22 MT was sold through e-auctions. Total sales during the first half of this fiscal stood at Rs 35,499 crore, of which Rs 6,134 crore came from e-auctions. E-auctioned coal was sold during this period at a price that was more than 68 per cent more than the notified price.
Banking on interest
The second part of Coal India’s strategy is to capitalise upon the huge cash reserves that the company has been able to accumulate over the years. CIL is, in fact, the cash-richest Indian PSU at the moment. “We have around Rs 53,000 crore of bank balance at present which yields certain interest income—roughly Rs 4,000 crore annually. This is a huge sum of money,” Coal India Chairman NC Jha told Business Standard, while explaining the three-pronged strategy.
Overall, there has been a massive 40 per cent jump in the company’s cash reserves over the last decade beginning with a meagre Rs 1,131 crore in 2001-02 to the current Rs 53,000 crore. The huge cash surplus nature of the coal sector monopoly had recently led the government to propose a share buyback proposal in Coal India. The proposal had with met stiff resistance from the company’s parent coal ministry at a recent meeting of the Union cabinet.
Reducing head-count
The third part of the strategy, which has remained unknown so far, has more to do with operations than financial windfalls. Here, the company decided to outsource as much as 40 per cent of the company’s production cost. The basic idea is to pull down dependence on the massive 3,80,000 workforce that the PSU employs and at the same time fetch more output per unit cost by roping in more efficient private parties to do the job. Coal India’s production cost currently stands at around Rs 1,100 per tonne.
“Had (outsourcing) not been there, CIL’s profit would not be there as well. Outsourcing is a formidable component in our profits,” said Jha.
CIL was traditionally a loss-making company with 100 per cent departmental activities and employing 7,00,000 people, with wages consisting of 55 per cent of total cost. Now, the wage component has come down to less than 45 per cent—Rs 18,175 crore—of total expenditure of Rs 42,202 crore.
Activities are outsourced to private companies which are successful bidders willing to deliver at a pre-determined price. “The private companies work at a higher efficiency. They can take more work out of their workforce. They can utilise their equipment more efficiently. They do not have to follow the government procedure for procurement of goods and services,” the official added. Outsourcing is typically done for three areas of work—extraction of coal, removal of overburden and transportation.
Experts, however, don’t buy Coal India’s impressive numbers and argue that actual efficiency gains rather than financial engineering is the way forward for the company. “What the industry requires is improved output and a gradually declining production cost. None of these two parameters are being met,” said Gokul Chaudhuri, Partner, BMR Advisors. “In fact, one reason for the dip in stock price is that the market acknowledges increased supply of coal and not better treasury management,” he added.
The company, on the other hand, rejects the argument of productivity loss. “How can we be blamed for not producing enough, when 50 to 70 MT coal is lying in our stocks. The problem is with evacuation infrastructure. How can we produce more than what is required and let the stocks pile up? Who would be responsible if these huge stocks catch fire?” asked a senior official from CIL.
Whichever way you look at it, with the coal shortage worsening, prices at e-auctions should continue to propel Coal India to further heights without having to worry about its operational performance just as yet.
