Can CIL survive the blow from shrinking e-sales?

Spot sales in e-auctions have been a cushion against depleting profitability flowing from CIL's relatively inefficient workforce and operational drawbacks

In December 2006, the Supreme Court had temporarily banned Coal India Limited (CIL) from selling coal through electronic auctions on the ground that spot trading through such auctions was becoming a profit centre for the state-owned coal producer. E-auctions had been launched in 2005 to ease coal supplies for customers in the non-core sectors of cement, fertilisers and sponge iron. Seven years later, the government is trying to reduce the volume of coal sold through e-auction - roughly 12 per cent of CIL's total sales of 462 million tonnes - to divert it away from non-core consumers to power companies which represent a "core" area of demand.

Last month, the government announced CIL would reduce volumes sold through e-auctions. The decision is subject to approval by the CIL board. The e-auction is a sensitive area of operation for CIL, and Union Minister of State for Coal, Power and Renewable Energy Piyush Goyal has clarified that his ministry would ensure the reduced e-auction sales do not impact the company's profitability. However, analysis of key aspects of CIL's e-auction sales in 2013-14 - which underscores the strong link between electronic sales and profits - shows that the government's task of preserving the mining company's profitability may prove daunting.

The company single-handedly supplies coal to meet more than half of the primary commercial energy needs of Asia's third-largest economy, and the strategy to boost supply to power companies by tinkering with e-auction might boomerang.

Historically, the auction has accounted for around 10 per cent of CIL's sale volumes but contributed 15-20 per cent of its revenue. The higher revenue realisation is attributed to the premium over the notified price of the same grade of coal. With the premium ranging from 50 per cent to as high as 120 per cent, spot sales have been a cushion against depleting profitability flowing from CIL's huge and relatively inefficient workforce, shortage of good quality heavy earth-moving machinery and delay in mining clearances.

Because of these constraints, CIL reported flat production for three years in a row between 2009 and 2012, before settling for a sub-5 per cent growth in the past two years. However, its net profit has not been impacted and has continued to rise - it was Rs 9,622 crore in 2009-10, Rs 10,867 crore in 2010-11, Rs 14,788 crore in 2011-12 and Rs 17,356 crore in 2012-13. How was this achieved? A closer look at the statistics shows that e-auction premia continued to grow during these years, helped by domestic shortage and the mild increase in global coal price benchmarks, which often influence spot prices.

Marking a decline
All of that has changed now. In 2013-14, Coal India reported net profit of Rs 15,711 crore - marking the company's first drop in profit since the global financial crisis of 2008-09. The extent of decline - 12 per cent - further added to the gloom. Total income, which had grown 54 per cent from Rs 44,000 crore in 2009-10 to Rs 68,000 crore 2012-13, also fell flat. The company attributed the slump in profit to provisioning for past arrears resulting from a two-year-old dispute with its largest customer, power generator National Thermal Power Corporation.

However, the dampening factor actually lay somewhere else - a 28 per cent dip in receipts from e-auction sales. CIL sold 58.1 million tonnes of coal, or 12.5 per cent of its total production of 462 million tonnes, through spot e-auctions in the last financial year. This represented a 31 per cent jump in volume over the 44 million tonnes in electronic sales the previous year. At notified prices, the quantum of coal sold through e-auctions in 2013-14 was worth Rs 9,281 crore. But the electronic sales yielded Rs 12,767 crore. CIL, therefore, earned an additional Rs 600 on every tonne of coal sold through the auctions (see table). While this may appear a significant margin, it was still 28 per cent less than the realisation of Rs 839 on every tonne sold through e-auctions the previous year.

Apart from the e-auction premia, two other factors have boosted profitability for CIL all these years - interest earnings from a huge cash pile and outsourcing of activities in order to cut costs. Both proved deleterious for the company in the last financial year. CIL's cash balance took a 16 per cent hit and had tumbled to Rs 52,389 crore at the end of March 2014 from Rs 62,236 crore a year earlier. In 2012-13, this cash had actually grown 7 per cent from Rs 58,202 crore at the end of March 2012. Then, outsourcing fuelled ballooning of contractual expenses in 2013-14 - this was Rs 4,900 crore in 2011-12, Rs 5,801 crore in 2012-13 and touched Rs 6,827 crore in the last financial year.

According to the power industry, CIL can remain in reasonably good financial health despite these constraints. "In case diverting coal from e-auctions leads to some loss, CIL can cover it through a price increase. Not meeting the demand is not a solution," says Ashok Khurana, director-general of Association of Power Producers, a body representing over 20 large power generators, including Reliance Power, Tata Power, Adani Power and GMR Energy. "According to policy, CIL cannot resort to e-auction if the demand from the power and fertiliser sectors is not being met. The company's inefficiency, coupled with delays in environmental clearances, has brought down production," he adds.

The way forward
Given these constraints, experts believe the company must focus on increasing production. It must wriggle out of its malaise of near-stagnant output for any meaningful turnaround in profitability that could counter the impact of a possible cut in e-auction receipts. "Production has not jumped in the past four years. It can be increased by more outsourcing and resorting to the public-private-partnership model of mining," says a senior analyst from a consultancy firm who does not want to be identified. He adds that CIL, which employs nearly 350,000 people, must also control expenses by curbing fresh recruitments. The third irritant - declining benefits from the cash balance - is unlikely to ease in the near term with the government expected to focus on the free cash pile of state-owned entities to address fiscal concerns.

CIL's production remained stuck at 432 million tonnes between 2009 and 2012 before growing to 462 million tonnes in 2013-14. Yet even this increase fell short of the output target by 20 million tonnes, mainly due to the absence of fresh environmental clearances for mining. The new government has promised to address this issue by "streamlining channels of communications" among the power, coal and environment ministries. CIL will await the outcome of this step.