By Sugato Hazra

From a sick public sector enterprise to what is going to be one of the country’s largest-cap listed entity (and most likely an index scrip) the journey of Coal India is a remarkable turn-around story. More so, since the Navratna PSU still sells coal at almost the half of the global price while providing 43 per cent of the nation’s primary commercial energy requirement. Contrast this with the total contribution of the oil and gas sector to India’s energy need — just 39 per cent and place the same against the kind of media and mind space the sector occupies compared to what CIL receives, the neglect, willing or otherwise, to recognize the Coal India success story will be difficult to wink at.

Partha S Bhattacharya, the Coal India chairman is a man with a mission. Joining just two years after the nationalization of the sick coal sector Bhattacharya has seen it all. The first sixteen years of nationalization threw all commercial consideration to the wind and the company just kept on digging coal for supplying energy to the nation.

This was the “coal at any cost” phase when a born sick company achieved a CAGR of 5 per cent from less than 2 per cent in the pre-nationalization era. But the cost for the company turned out to be onerous. It weakened the balance-sheet badly. The accumulated loss saw erosion of 40 per cent of its equity and created a massive US$ 565 million of overdue debt service liability to the government. But nobody complained.

The scenario changed in 1991 when Dr Manmohan Singh, the then finance minister under Narasimha Rao, took the economy away from the licence-control-raj to an era of liberalization and globalization. Coal India could not count on the annual budgetary support any more. Till 1991 Coal India received an average annual support of US$ 108 million from the government. Now it woke up and adopted financial viability as key factor for investment. “This was easier said than done,” says Bhattacharya, “accustomed as we were in just digging coal for the nation oblivious of any business concern.”

Coal India decided to work as a commercial organisation. Commercial viability became the sole factor for taking up a new project. The company adopted a strict discipline on debt servicing and began repayment of the debt due to the government. In February 1996 the government restructured Rs 2200 crore of capital. From 1991 Coal India as a whole turned profitable but not all its subsidiaries managed to get out of the red. Initially there was free flow of funds between profit-earning and loss-making subsidiaries but the same gave way to a structured corporatised fund flow through a clearly defined dividend policy. The structured support for the loss-making companies was only for maintaining production. The steps saw the annual average flow of cash from Coal India to the government increase from US$63 million between 1991-97 to US$312 million between 1997-2002. The improved financial health saw the company securing investment grade rating. It also obtained a World Bank/JBIC loan of US$1.6 billion. It availed US$522 million of the fund sanctioned.

Bhattacharya recalls how difficult had been the banks in the initial days of restructuring. ICICI, the predecessor of today's ICICI Bank, assigned BB rating to Coal India. When told that if Coal India had gone bankrupt so would the Indian economy taking ICICI with it, the bank officials relented. But obtaining fund for operation and cleaning up the mess created in the first phase of its existence had been only one part of the problem.

The late 1990s saw a sharp drop in coal prices globally so much so that imported coal turned cheaper than the domestic coal at least in the coastal areas. This led to Coal India putting a brake on its expansion plan. It did not draw the entire World Bank line of credit. For the first time in its history the PSU did not encourage production growth. But that was an aberration.

Soon commodity prices turned around, first due to demand from China and next due to a period of economic growth both in the developing economies like India, Brazil and Russia and also in the developed economies. Coal India by then had done all its internal adjustments and was sitting strong to encash the boom. From 2002 onwards Coal India has shown what a determined public sector giant can achieve.

Chairman of Coal India Partha Bhattacharya knows how difficult the task had been. He does not take kindly to stereo-type comments like inefficiency of the state-owned company, “When we sell coal at less than 50 per cent of the global price and yet make 30 per cent operating profit should we be called in-efficient?”

The important point to note is that Coal India has increased price only at an annual average rate of 4 per cent which is lower than the average inflation rate of the country. In other words the inflation adjusted price of coal in India is less than what it was in 1991.

“Coal India has kept the national priority as its benchmark, yet operated as a commercial organisation and reached where it is today. We are the largest coal mining company in the world — our production is 80 per cent more than the second largest one. We have seven times more reserve than the second largest coal miner,” tells Bhattacharya.

The debt-free coal giant with US$7.4 billion of cash reserve (as in February 2010) produced 431 million tonnes of coal and earned a profit of US$2.56 billion in 2009-10. Coal India operates 479 mines - out of these 279 mines are underground, 163 are open cast and 31 are mixed. Production from Open Cast mines stood at 388 mt (88 per cent) and 43 mt (12 per cent) from underground mines. The coal giant is in the process of setting 141 projects in the next ten years. This will involve 62000 hectares of land.

When it was nationalized Coal India had 676,000 workers on roll. At present there are 400,000 — 276,000 less through the process of retirement. The average age of a coal worker is rather high 47 years. In due course when the new mines will come up there will be less requirement of manpower and the number of workers is likely to come down further. Coal India has put man and machine in an optimum proportion. As a result its cost per tonne of coal is one of the lowest in the world — US$ 16.12 per tonne. If we take only the open cast mines the same works out to even less, US$ 11.50 per tonne. Coal India produces an average 5 tonne of coal per manshift.

Safety is a critical issue for any mining company. “Chances of having a major accident in our mine is as high or as low as the mines in USA or anywhere else,” said the CIL chairman. The statement does not highlight the difficulty of maintaining mine safety in India. The geological faults in India make it difficult for mechanized mining. Due to the population density mining turns hazardous; shifting people is costly and time consuming. Contrast this against 190,000 sq km of barren land available on top China’s coal deposits and the Coal India problem will be apparent.

“We are not happy with the low probability of accidents. We still lose about 60 miners in accidents and want to install warning system of sorts," said Bhattacharya. Coal India is now working with the Indian School of Mines, IIT and Jadavpur University to devise alarms for miners so that fast evacuation from accident zones is made possible.

The other concern of Coal India is managing the environment and maintaining the same for posterity. The Navratna PSU has now 29 open cast mines which have won ISO 14,001 certification for environmental impact management. What is more the company has satellite surveillance map to show how green cover in its mining area has increased. Coal India planted 75 million trees — survival rates of such plantation is 75 per cent. “In fact some areas where Coal India did such plantation has been declared 'no go' area by the ministry of environment so dense has the cover become.” Partha Bhattacharya, a modest person, could hardly conceal his pride when making this statement.

Coal India in particular and any PSU in general are reviled on two counts — lack of concern for environment and inefficiency. The first part of the criticism can be answered from the satellite surveillance images. The second part that of inefficiency can be answered by the performance figures.

“When a company charges half of the global price and yet makes 30 per cent operating profit can anybody still call it inefficient,” challenged Coal India CMD. Even the unflappable finance minister of India did admit Bhattacharya had a point.

But what is in store for Coal India? How much can an investor in Coal India scrip gain in the medium term? The answer to this question will help the coal giant when it goes for listing in the next few months. While Bhattacharya will not comment directly on this, one can piece together some threads from his presentation on the company.

First take a look at the price. If the price of Indian coal is half that of the global rate the reason could be in the low calorific value of Indian coal. Typically calorific value of Indian coal is 4000 against 5000 of standard international coal. This can improve if India washes its coal. Coal India is setting up 20 new coal washeries with more than 111 million tonne per annum capacity. By year 2016 Coal India plans to wash a large part of its coal. If unwashed coals fetch US$ 20 a tonne by spending say another five USD or so per tonne Coal India can turn its coal into the international grade. This costs US$ 45 per tonne. Even if coal is sold at say 15 per cent discount to the international price Coal India can realize at least US$ 15 per tonne extra. In other words earnings, therefore profitability, of Coal India will increase substantially. Since coal companies are generally quoted at least 12 to 15 times their earnings the price of Coal India share will jump manifold by year 2016. An investor can only gain by investing in the forthcoming IPO of Coal India.

Washing of coal is just one of the many factors in favour of Coal India. Buying coal equity abroad is another. Apart from acquiring two coal blocks in Mozambique, Coal India has recently floated a global tender for tying up coal supply with global companies. In response there have been several proposals out of which some ten proposals from listed companies are under advanced stages of due diligence. Coal India has engaged services of three merchant banks for due diligence. The company officials will visit mines on offer. The aim is to tie up long term supply for India either through equity participation, outright purchase or long term supply deals. In any case the company will earn extra profit through coal equity tie up and at the same time provide much needed fuel for growth. It is a win win situation for investors.

Now is the time for Coal India to show what it has achieved quietly. Liberalization saw to the demise of a number of companies in India in the public or private sector. Curiously the same period saw Coal India rising from the ashes like the Phoenix. Point to note is that despite competition, despite opening up the sector for private sector use Coal India kept growing. It did not allow coal price to increase - in fact whatever price rise has happened the reason had been cost push. “Our average price rise had been just about 4 per cent per annum, less than the inflation rate during this period,” says Coal India chairman proudly. Those who still love to talk of inefficiency of PSU should perhaps look for some other sector to justify their obsessive dislike of India's state owned successful companies.

Coal India today is the largest among all coal mining companies in the world. In fact it has more than seven times the reserve of the second largest company — Peabody. It produces coal at an average US$ 17 per tonne against US$45 of Chinese Shenhua.
Shenhua, a larger company in terms of revenue, sold 233 million tonnes of coal against 416 of Coal India. Shenhua is also in the business of power generation and logistics while Coal India is just a coal mining company.

Once a sick company is today the world's largest coal mining company, most profitable if the cost of per tonne coal is a yardstick and one likes it or not is expected to emerge as one of the most sought after stocks once it gets listed in the next few months. If Coal India employees led by its Chairman feel proud of their position today one cannot grudge that. They have earned every bit of it by dint of their committed labour.