The burning question

With the government planning to sell more of its stake in the company, investors’ expectations will only rise. CIL might have no option but to give in to shareholders’ demands. But the question is: will it?

The opportunity to own part of a blue chip company in a sector where demand is unlikely to go down was reason enough for investors to turn a blind eye to CIL’s problems. But now that they own shares in the monopoly, chances are they will seek more accountability and transparency.

There’s also the optimism of investors that CIL will change for the better. “PSUs are like elephants in the market, slow and stable. They need to change but how soon it will happen remains to be seen,” says Agarwal. He adds that CIL was undervalued even after factoring in a 10% margin to account for losses due to illegal mining.

“Investment in such companies is like a fixed deposit. After the initial euphoria, people will stick with the stock for 10 to 15 years,” says Agarwal. Unlike a Reliance Industries or Tata Consultancy Services, public sector companies such as CIL are not expected to trade in huge volumes and move the indices.

The market has calculated India’s growth story and the increase in demand for power. With coal being the primary fuel for power generation, demand will remain steady. CIL has been giving dividends consistently and is not expected to slow down in the near future.

Indian investors, however, might have factored in these negatives. Rajesh Agarwal, head of research at Kolkata-based Eastern Financers, says that investors know about CIL’s ailments but the offer price was attractive enough to participate in the IPO.

Bhattacharyya’s response: “We cannot avoid corrupt individuals in the system. People should look at the big picture and not form an opinion about the organisation based on these charges.” Haldea agrees, adding that corruption is not restricted to public sector companies.

Even those at the top stand accused. Bhattacharyya’s predecessor, N.K. Sharma, who took over as chairman in February 2001, was suspended two years later amid allegations of kickbacks and over-invoicing for excavation machinery. More recently, in May, M.P. Dikshit, ex-chairman and managing director of South Eastern Coalfields, a CIL subsidiary, was arrested for accepting a bribe of Rs 1 crore.

The CIL offer document lists corruption as one of the risk factors resulting in “loss of revenue, resources and property of our company, as well as disruption in operations, which could have a material adverse effect on our business, operations and financial results”. There are 615 charges, including corruption, pending in court against CIL employees and subsidiaries.

Experts say that even if pilferage of 10% to 15% is taken into account, the potential of the business is so huge that CIL will still remain profitable.

However, Jibon Roy, general secretary of the Centre of Indian Trade Unions, says CIL loses nearly 50 million tonnes of coal annually to a nexus of private contractors, politicians, CIL officials, and Naxals. That’s 11% of CIL’s production, or 10 times the unofficial estimate.

Unofficially, CIL pegs the losses due to illegal mining and pilferage at 1% of production. “The view within the company is that the investment required to prevent such pilfering would be much higher than the value of the losses,” says a CIL official on condition of anonymity.

However, S.K. Chand, senior fellow, The Environment Research Institute (TERI), and a coal mining expert with more than 30 years of experience in the sector, says the process of assessing demand is flawed, and that the actual need for coal is greater than the government estimates. “The numbers are underestimated and small-scale sectors such as brick kiln and scrap steel mills are not taken into account, fuelling pilferage and illegal mining,” says Chand.

Experts trace the root of illegal mining to the gap in demand and supply. In the last three years, the demand for coal in India has been rising by 9% to 10% a year but the supply has increased by only 6% to 7%. Anticipating the widening of the gap, CIL has announced an additional capacity of 81 million tonnes from 45 projects. According to government estimates, the demand-supply gap is around 12%.

IT IS NOT DAWN YET in the coalfields of CIL’s subsidiaries—Bharat Coking Coal and Central Coalfields in Jharkhand. A fleet of trucks billows black smoke as it desperately negotiates steep and narrow roads. The trucks are overflowing with coal from the mines, and are headed for depots around Varanasi and Mughalsarai in eastern Uttar Pradesh. In all the smoke and noise, it’s almost impossible to notice a small convoy of bicycles headed towards the neighbouring villages, all loaded with sacks of illegally mined coal.

Another wage revision is due next year, which is likely to push this component on the balance sheet further up. Compare this with Missouri-based Peabody Energy, the world's largest private sector coal mining company, which produces around half of CIL’s output with less than 2% of the Indian company’s workforce.

The unions feared that one of the results of divestment would be a reduction in the number of workers. In
the run-up to the public offer, CIL reduced manpower from 426,077 in 2008 to 394,041 by June 2010. But salaries and benefits comprise almost 43% of expenditure.

Shareholders will also have to deal with the fact that they are not the only ones putting pressure on CIL. The trade unions opposed the divestment vehemently. They carried out a sustained campaign to prevent workers from subscribing to the 10% of the IPO that was reserved for employees. Finally, only 8% of the employee portion of the offer was subscribed.

The good news is that even with such a high percentage of bad mines, CIL has managed to deliver consistent profits and the company prides itself as being a lean and low-cost producer of coal at Rs 745 per tonne. However, the low cost of production is primarily because of open cast mining; such mines account for close to 90% of CIL’s production. However, this method of mining has come under severe attack from environmentalists. The opposition to open cast mining is likely to intensify as shareholders pay more attention to the company’s environmental record.

A quick example. In fiscal 2010, CIL produced 431.26 million tonnes from its 471 mines. However, 279 of these mines are loss making and account for only 13% of production. And because of the government’s socio-political compulsions, these mines cannot be closed. So, even though they add to the operating cost of the company and provide no revenue, no matter how hard the shareholders try to get them closed, it’s unlikely they will prevail.

That also means the folks at CIL will be torn between two masters—the markets and the state, which continues to own 90% of the company. And it is quite possible their objectives won’t always be aligned.

Haldea concurs, adding that listing of a PSU subjects the company to intense market scrutiny. “On its own, the company starts disclosing or reporting significant changes or decisions to the stock exchanges,” he says. An analyst, who asks not to be identified, says that disclosure pressures would lead to an improvement in internal procedures, and that CIL would have to shake off its bureaucratic sloth.

The listing also means that CIL will be under greater shareholder scrutiny and increased pressure to perform better. “They have to face the ‘what next’ question every quarter. Reasons for higher costs and project delays would come under the scanner. All this means increased management focus,” says Naveen Vohra, partner (metals and mining) at consulting firm Ernst & Young.

At first, some of that just may happen. The share listing ensures that CIL will now be categorised as a Maharatna. Four other public sector outfits—NTPC, Steel Authority of India, IndianOil, and Oil and Natural Gas Corporation—bear this stamp. It essentially ensures that the state does not interfere in their day-to-day functioning. Among other things, Maharatnas don’t need the Cabinet’s approval to set up joint ventures and wholly-owned subsidiaries in India or abroad, or invest up to Rs 5,000 crore in one project. “The internal systems and processes change,” says S.K. Roongta, former chairman, Steel Authority of India. “The company takes decisions faster and shows better competitive character,” he says. To be accorded Maharatna status, the state-owned corporation needs to fulfil six criteria—have Navratna status; list on an Indian exchange; report an annual turnover of Rs 25,000 crore, net worth of Rs 15,000 crore, and a net profit after tax of Rs 5,000 crore (all for at least three years); and have a significant global presence—which CIL does.

But, uniquely, this IPO was never about money. Kolkata-based CIL gets none of the riches; the selling shareholder, the Government of India, gets to keep it all. “The listing is a way to promote better governance and increase transparency within the company,” says Bhattacharyya. “It gives the government the much needed confidence to give more financial autonomy to the company management.”

The government raised Rs 15,475 crore from the CIL listing, compared with Rs 5,386 crore that it made when National Thermal Power Corporation (NTPC) was listed in November 2004.

The amount of hype surrounding the CIL initial public offering almost made Bhattacharyya’s efforts unnecessary. The noise only increased when the IPO was oversubscribed 16 times; the Rs 245 share was listed on the National Stock Exchange on November 4 at Rs 291 and closed at Rs 345. Since then it has been trading between Rs 323 and Rs 350. The other mammoth IPO to which CIL is compared (both in terms of size and impact on market liquidity), Reliance Power, listed on the NSE at Rs 530 on February 11, 2008, and closed at Rs 372.30. “Reliance Power did not have a track record and past price relation. The Reliance brand and the market conditions propelled the public listing. If CIL was in the private sector, the IPO price would’ve been even higher,” says Prithvi Haldea, an expert on the primary market, and chairman and managing director, Prime Database.

IN THE TWO MONTHS preceding Diwali, Partha S. Bhattacharyya, chairman and managing director of Coal India (CIL), was busy playing salesman. Not for coal: CIL, ranked 11 on the Fortune India 500 list, is a near monopoly producer, so buyers flock to it regardless. What Bhattacharyya was doing was wooing institutional investors to buy 10% of the government-owned behemoth.