The muck stops here

As summer sets in, reports of power shortages across the country, particularly in northern parts, coupled with power plants running on the critically low level of coal stock trigger public anger as government departments scramble for answers and excuses.

And almost always the buck stops at Coal India Ltd (CIL), the country's near monopoly miner that feeds our thermal power plants along with cement, aluminium and several other sectors.

Beyond the financial figures and performance matrix, we take a look at reasons that ails CIL and the issues that get buried under its quarterly ramblings.

THE GLORY DAYS

On November 4, 2010, a day before Diwali, the country witnessed the listing of Coal India shares, which was the largest offering of shares by any Indian company till then.

With a market cap exceeding Rs 2 lakh crore on the first day of listing, Coal India briefly turned out to be the most valuable listed entity in the country surpassing the largest private conglomerate Reliance Industries.

That significant capital formation mostly benefited the Indian government, which has a direct holding of 73% with another 9.58% being held by PSU insurer Life Insurance Corp as on December end 2018.

As the government maintained its tight grip over the ownership of CIL, the listed entity saw little improvement in corporate governance with the Board mainly controlled by the ministry representatives, government nominees and three executive directors, including the chairman.

Beyond the quarterly numbers and the occasional analysts' meet, little has changed in the attitude of the state-owned entity.

For instance, the uneasiness of the professionals and foreign investors, who had invested during the company's IPO, were engaged in a long drawn fight wherein the Coal India management and The Children's Investment Fund Management (UK) LLP fought a legal case against the corporation over the charges of mismanagement and ignoring shareholders' interests in 2012.

The activist foreign investor eventually sold out its investments completely and raised key questions; the inherent contradiction between Coal India's dual purpose of remaining an extended arm of the government to feed the power plants even as investors' interest through improvement in efficiency parameters got buried for good.

Such concerns have got reflected in the company's valuation at the bourses over the past few years.

"Coal India has witnessed unprecedented de-rating over the last 2-3 years. The stock trades at 8.1 times its P/E (against average of 14x) despite a steady return on equity. Current valuations are now at 45-50% discount to long-term averages," brokerage house Motilal Oswal said in a recent report.

MONOPOLY MATTERS

The absence of competition is a major policy lacuna in the coal mining sector that has led to the creation of an inefficient behemoth that almost monopolises the supply of fuel to power plants, most of which run on coal.

While state-controlled monopolies have long been broken in sectors like aviation and power generation, competition continues to elude the coal mining sector.

"A country of the size and complexity of India should not have depended on one commercial entity for meeting over 80% of its coal demand that has cost us dearly. The experiment with end-users mining captive blocks has also not met with any significant success either. Every other major coal producing countries such as Australia, South Africa, the US, China and Indonesia have multiple coal producers with core competence in mining," says Partha Bhattacharya, a former Coal India chairman and an industry expert.

Even in China, there are multiple coal mining companies while private sector competition has led to the adoption of best in class mining and environmental practices among the coal companies, particularly in Australia, US and South Africa.

"Environmentally benign, mechanised underground coal mining in China has flourished way beyond conceivable limits while it continues to remain at a nascent stage in India," Bhattacharya says.

IMPROVING PERFORMANCE

Despite the limitations faced by the company due to its monopoly status, Coal India's operational and financial performance parameters have been improving off late.

"The company has managed to keep the cost under control, despite inflationary pressures. Operating leverage and high natural attrition are driving operating efficiencies. Price hike about a year ago has provided a boost to earnings, offsetting the wage hike impact. Coal quality issues have completely worked through in revenue," the research report by Motilal Oswal says.

FROM MINE TO TURBINE

Most of the CIL's 369 mines, operated by around 2.5 lakh miners, are located far away from the power plants and are shipped mostly in an inefficient way, through rail wagons or in mid-sized trucks.

The supply to power plants depends largely on the availability of wagons from Indian Railways, which till 2017 worked under separate ministers.

Under Piyush Goyal, both coal, as well as the railways ministry, started working in a coordinated way, thus ensuring supplies of wagons and also initiating dedicated rail projects to bring coal from mines to power plants.

Some critical rail infrastructure projects like Tori-Shivpur track of 44.3 km, Jharsuguda-Barpalli-Sardega link of 52.4 km and the 44 km Kharsia to Korichhapar line were completed in FY19.

FUTURE TENSE

In the coming days, expectations from Coal India would increase as rising demand for coal would see stranded power plants start billowing smoke and operating ones generate more to switch on more ACs, refrigerators or TVs in smaller towns and villages.

In FY19, Coal India produced 607 million tonne, a modest growth of 7% over the previous year's production of 567.37 mt and falling short of its target of 610 mt.

Supply to power sector at 488 mt went up by 7% while India's power generation also grew by 7% during the year while overall capacity utilisation or Plant Load Factor of coal-based plants stood at a low 61.1%, according to Care Ratings.

"Once the PLF rises to 85%, there would be additional demand of 250 million tonnes of coal a year and further demand of around 150 MTPA can arise if India decides to take effective steps in restricting the import of thermal coal excluding the quantity required to run import dependent coastal power plants," Bhattacharya says.

If we include projects under construction as well as non-operational power plants that are stressed due to insolvency and other reasons, there could be further demand of 100 MTPA.

"Creating additional capacity for production of 500 MTPA of coal at the earliest holds the key to economic prosperity and inclusive growth as well as mitigation of the risk of the staggering bank exposure on generation companies turning bad," he said.

PREVENTING IMPORTS

Unless Coal India or the private sector, which has so far fared poorly in producing from the captive mines it was allocated, are able to meet this demand, the country would be spending foreign exchanges to fund imports.

According to the International Energy Agency's new policy scenario, demand for coal in India and Southeast Asia would more than double during the period 2017-2040.

Between 2018 and 2023, IEA forecasts coal-fired electricity generation in India to grow 17% and in Southeast Asia 26%, respectively.

"Growth in these regions offset the flattening in demand outside of Asia and presents significant opportunities for Australian coal given the proximity to these growth markets," says Mineral Council of Australia.

Forecast of such sharp growth in coal imports, however, assumes only modest growth in the country's renewable energy sector, something which has been challenged by the Institute of Energy Economics and Financial Analysis. The agency says assumptions about the pace of India's renewable generation growth were unrealistically low and estimates of India's electricity demand were unrealistically high.

Use of imported coal by the Central Electricity Authority monitored plants rose 6.3% to 55.3 mt during April-February over the corresponding period of the previous year.

Coal from Australia and Indonesia accounted for two-thirds of India's total coal imports. South African coal import fell during the year and was substituted by coal from the US.

"Factors contributing to increased dependency on imported coal have been lower e-auction of coal by Coal India. Coal sold through e-auction has fallen by 30.1% to 56.17 mt during April-February against the corresponding period in the previous year. The auctioned coal fulfils demand from captive power plants and non-power sectors," Care Ratings said.

Irrespective of the ways the future demand and supply scenario plays out, CIL needs to boost its production growth at rates that surpass rise in current thermal power generation, or else India would be forced to hike its imports to offset future growth in power demand.

And that not only means we would be forced to depend on other countries to meet our critical energy needs, but would also lose the precious foreign exchange reserves that can, otherwise, be put into better use and to meet national exigencies.

NO LONGER A DIRTY WORD

With the renewable energy sector not growing up to its full potential as anticipated and nuclear energy still remaining a risky and costly proposition, coal is no more a dirty word.

For long, Coal India has been at the receiving end of all the criticism that India had to face for its overdependence on coal for fuelling its power plants and for doing little to stop and heal the sinkholes and toxic gasses emission from the burning fields of Jharia.

The emergence of Donald Trump changed the narrative though. Coal India, however, would do well to make its coal lot less polluting through the setting up of more washeries and putting to an end the misery of the villagers in Jharkhand and elsewhere.