Allaying apprehensions of the investors’ community, the new CMD-designate of the world’s largest coal firm, Coal India, S Narsing Rao says the coal miner will pass through cost of imported coal to its consumers in a bid to protect its financial health and investors’ interests.
Apart from immediately looking at certain key ‘low hanging fruits’ to address the coal production and supply shortages to honour commitments as directed by the Presidential Order, the state-owned firm will also import coal to meet shortfalls, if any. After meeting the supply commitments under fuel supply agreements (FSAs), CoalIndiamay also explore the possibility of addressing additional coal requirements of customers at higher prices, may be at weighted average of e-auction price, to improve revenues and profits.
Rao told ET’s CR Sukumar that Coal India will protect the interests of its majority shareholder government of India by meeting its commitment of providing resources for the growth of economy and at the same time protect interests of minority shareholders including the foreign and domestic institutional investors by strengthening the coal miner’s financial health. Excerpts:
How will the new management improve the perception that Coal India is not committed to its shareholders?
Of course, there is a slight conflict of interest amongst the shareholders. The majority shareholder is the government of India. Apart from being the majority shareholder, being government, it has much larger responsibility beyond the shareholder’s responsibility. Coal sector in India has huge potential and I don’t think the minority shareholders need to be worried at all. Once the company starts improving its performance in the form of improving production, dispatches and realisations, the volumes will fetch good results in the days to come. Coal India will continue to be very investor-friendly company. Two years not being able to show any growth is certainly a matter where shareholders will be concerned. But I think we will change the situation.
Coal India has production issues and at the same time it also has been accused of increasing sales through auctions by diverting sales to contract purchasers.
Selling through e-auctions is largely in the best interests of the shareholders because it fetches 70-80% higher price over the notified price. However, the spirit of e-auction was not really for maximiszing revenues. The rationale behind e-auction was to arrive at price discovery in the backdrop of shortage, monopoly and administered kind of a price. The e-auction concept was introduced so that the needy customers, who could not get linkages or adequate linkages, can get coal through price discovery. Of course, there is justification in the concern of customers when one is not fulfilling the entire linkage quantity and yet selling through e-auction at high prices. I think, going forward we should be able to address that also.
How will Coal India continue to operate as a monopolistic player in a space that is so vital to the economy?
Ultimately, government is the owner of Coal India and it is also the custodian of the economy. The government is responsible to provide resources for the growth of the economy. It is a larger issue than a monopoly. Without making any value judgement as the CMD-designate of Coal India, I think the resource (coal) belongs to the sovereign nation. Being a government company, there is a legal, administrative and ethical responsibility on Coal India to fulfil the needs of the economy. Energy being the crucial ingredient and driver of economy, we cannot be dwarfing the economy because of our inefficiencies or different priorities.
What will be your reaction to opinions offered by The Children Investment Fund on failure of the Coal India board? The Fund says Coal India loses $20 billion a year due to discounted pricing.
I am refraining from commenting on this and I will prefer to react only after formally joining Coal India. Government of India is reacting to it and I will possibly react at an appropriate time once I am there.
Independent directors on CoalIndiaboard have been voicing their opinions about the company’s FSAs. How will you react?
The government has thought through the FSAs that it is not purely the commercial interests of Coal India in a limited context but overall the economy of the country should be kept in mind. There will be certain nittygritties that we need to work out whereby the company’s interests are also protected. The purpose of having independent directors on the board is to gain from their huge experience and wisdom. We have highly enriched boards for both Coal India and its subsidiaries. Their opinions are advantageous for the company and we respect their concerns.
With the Presidential Order in place, Coal India’s production needs to reach at least 500 million tonne from the existing 435 MT to meet the supplies to power sector. How do you plan to achieve this?
The panacea is increasing production and despatches. I am sure there are critical areas where there are certain roadblocks. Issues like improving the productivity of the heavy earthmoving equipment holds good promise. We will identify some coal blocks where mass production is possible but not immediately constrained by the land acquisition and forest issues. We will first focus on the low hanging fruits, capture them fast and meanwhile get going to address the constraints affecting the production. There are problems pertaining to couple of railway tracks. If highest level of indulgence is sought and sorted out, then major problems will be sorted out. These are critical missing links of just 50-60km of railway tracks. There are three lines and if they materialise in the next 24 months, the production can be increased substantially.
What are the other key ‘low hanging fruits’ that come to your mind to address the near to short term production constraints?
There are potential projects where you can expand and open them but then there is no evacuation infrastructure. Once you have evacuation system in place, you can produce more. For example, there is a mine with 10 MT capacity and assuming that they have already reached that capacity. We will look at whether we can increase it to 15 MT. All we need is environmental approvals through public hearing as the existing approvals are for only 10 MT. We can step up the production easily. The advantage here is that the system and evacuation infrastructure are in place. The protracted problems of land acquisition, R&R and forestry clearances etc won’t be there. Another area is, in the past underground coal mining was done where hardly 20-30% of coal was extracted. We will look at such mines wherever they can be opened up. The advantage here again is that land acquisition is not an issue because surface rights are already there. Evacuation infrastructure was also there. Only issue is environmental clearances and project approvals. If we can manage these two quickly, we can open up such underground mines. In a nutshell, improving productivity of existing mines, enhancing capacities wherever feasible and extracting locked up coal from underground through open cast mining are the quick low hanging fruits that I look at.
If Coal India has to meet the supplies mandated by the Presidential Order, it has to cut down its e-auction offerings, which will affect its financial performance since it has been earning major part of its profits through e-auctions over the last few years. How do you plan to address this?
Maintaining the sustainability of revenues and profits is a must. We may look exploring the possibility of what we successfully did at Singareni Collieries. We, at Singareni, negotiated the price with the customers such as NTPC, AP Genco and others after fulfilling their linkage commitments on their additional coal requirements. We told them that we are ready to supply them coal over and above the linkage quantities but we will sell such coal at weighted average of e-auction price. It was a win-win for both. They get additional coal and we get additional money. At Coal India, we will explore to see whoever among the FSA holders is willing to pay weighted average of e-auction price for additional quantities over and above the linkage quantities. This way, we can avoid criticism and yet protect the interests of the company and its shareholders. If there is still a shortfall in meeting the needs of customers, we will import coal or entrust it to another public sector company.
How about the pricing such imported coal? Coal India board and investors have sought clarification on cost to be borne by power developers, before committing itself to such imports.
Of course, the imported coal cannot be subsidised. Coal India’s business is not to subsidise the imported coal. The shareholders have legitimate right to take objection to a move of subsidizing imported coal. If we are compelled to import coal, we should at least pass it on to the developers and customers by making a marginal profit on such imports. Though we don’t see coal imports as a major income source, we will not at least allow coal imports to drain our profits. The commitment made through FSAs is for the coal quantities, which we will meet through imports if needed, but there is no commitment on price.