Coal India's future depends on performance
Suman Layak October 18, 2011Dhiren Shaw grew up in Sanctoria, a small town close to the spot where the Barakar flows into the Damodar river on West Bengal's western border. Life at Sanctoria is a slow trot in the shadow of the headquarters of Eastern Coalfields Ltd, or ECL. But Shaw, now 45, who got his job as a security guard at ECL when his coal-miner father Sitaram was declared unfit, often has his mind on buildings he has never seen, thousands of miles away - the Bombay Stock Exchange and the National Stock Exchange.
"I will buy more shares if they give me any," says Shaw, who owns 400 shares today but confesses he knew nothing about stock markets before the initial public offering, or IPO, of the public sector giant, which accounts for 80 per cent of India's coal production. The Rs 98,000 that he invested in the IPO has touched a high of Rs 1.68 lakh.
Shaw has been bitten by the investing bug ever since he got into the CIL IPO and the associated account with brokerage firm Prabhudas Lilladher during the IPO. CIL surprised almost every analyst when it overtook Reliance Industries in market capitalisation, hitting Rs 2,51,170 crore.
Special: Coal India among best performing PSUs
Nirmal Chandra Jha, CIL's technical director with additional charge as Chairman, is modest. "It is not that we overtook others. It was more like other companies fell below us." Jha is learning that it is tough to please shareholders and analysts while facing the challenges CIL does. Acquiring land from villagers to get at coal seams, securing environmental clearances, controlling the damage wreaked by the rain gods, and handling wage negotiations with nearly 4,00,000 employees. (In 2010/11, CIL's consolidated wage bill was Rs 24,358 crore.)
Right now, CIL's biggest problem is the production dislocation this year caused by the rains. Although it rains every year, this season, rains were of the sort that seep into the mines instead of running off into surface drains. It also rained more than usual, and in months when it does not normally rain. "Now mines are recovering, and production is coming up, but not coming up to the level we had planned," says Jha.
As a result, many thermal power plants were down to three days stocks in October. When the government asked CIL for four million tonnes from a quota it sets aside for e-auction sales at much higher prices, analyst firm Nomura said that if the diversion was not recouped soon, CIL's earnings per share could be affected by 2.2 to 2.5 per cent. Yet Nomura maintained its buy recommendation for the stock. Welcome to the world of analysts! Shareholders see another threat looming: the new land Bill, which will require mining companies to share 26 per cent of their profits with the villagers affected by mining.
But Jha is not perturbed. "Even though the profit will be shared with landholders, it will provide an opportunity to the landholders to come forward and offer land. The present situation is that landholders try to restrict, or oppose any initiative for purchase of land," he says. Jha says that as more land becomes available, production will increase.
"So whatever profit is shared with land losers, can be made up for by increased volume of business." Production remained flat in 2010/11 and dropped marginally in the quarter ended June 2011. Difficulties in forest and environment clearances have not helped. "The issue has been proactively handled, and the solutions are now coming," says Jha.
CIL has also to keep consumers happy in the face of the shortage. It has tried to put in place fuel supply agreements, or FSAs, with bulk customers such as power plants. CIL gets an incentive for supplying at least 90 per cent of the contracted amount, while the utility faces a penalty for failing to lift that amount. The plants complain that there is no penalty on CIL for failing to supply coal, and that power plants which came up after 2009 are not getting to sign any FSAs. Such complexities make it difficult for CIL to simply gun for growth.
Amitabha Ray, who retired in February this year as CIL's chief general manager for marketing, knows this well. "Growth is the biggest problem," says Ray, who has also invested in the IPO. "Either the government allots CIL new coal blocks...or, it will need to aggressively acquire coal blocks abroad and also import coal."
CIL faces another challenge common to India: corruption in its ranks. Even before listing, CIL had begun the move towards greater transparency by signing up with Transparency International in 2007 to change its systems.
The same year, Nihar Banerjee, a civil servant, was appointed Chief Vigilance Officer. Banerjee has been accused of being over enthusiastic about charge-sheeting executives and then paralysing decision-making. Banerjee says that more than 99 per cent of the cases he is handling have been forwarded to him either by the coal ministry or the Central Vigilance Commission, or CVC, and were not instituted at his initiative. "Our views, along with those of the chairman, are forwarded to the CVC and the CVC takes a view on action to be taken. It is then up to the chairman to accept the CVC recommendations," he says.
Jha declines to comment on Banerjee's actions, but says the real test lies in separating the honest mistakes from cases of corruption. CIL needs corporate chutzpah to stay near or at the top of the marketcap rankings. Every move it makes will be watched by analysts, shareholders like Shaw and Ray - and even the big funds.
One of the largest investors in CIL is The Children Investment Fund Management of the UK, today the largest shareholder after the government. The hedge fund, which manages an eponymous fund, has a reputation for shareholder activism, something that is rare in India.
Additional reporting by Somnath Dasgupta