Coal India clocked 13 percent production growth in the third quarter (Q3) and 7 percent in the April-December period, which shows that a 10 percent production volume growth per annum is very much possible, says former chairman of CIL Partha Bhattacharya. For that to happen, however, an all-round concerted effort from the Centre and the states need to happen, he adds.
Going ahead, he expects cost per unit to fall on higher production. According to him, the PSU behemoth's prices are at a discount to international prices and there is a scope for further price hike.
On divestment, he does not think this is the right time. He explains that the company needs to improve its profitability and production to get proper value.
Below is the verbatim transcript of Partha Bhattacharya's interview with Menaka Doshi & Anuj Singhal on CNBC-TV18.
Menaka: There was some concern yesterday that they could be a serious impact on production because of the strike if it got extended. However, thankfully so it seems consensus have been found the strike has been called off. Where and how do you see Coal India positioned today now to take care of the needs of an economy that is hopefully on the recovery path?
A: If you look at the performance of the quarter three for Coal India, it has produced a stellar kind of a performance, growth of something like 13 percent in production. This has led to year till date that means April to December growth of more than 7 percent that is something Coal India has never achieved. So, it is all possible with concerted action and help from the government, help in terms of faster clearance - environmental and project clearance is possible, that has been demonstrated.
Menaka: So you are saying that one billion tonne gross output target is doable by 2019 given that we are at half that level if at all in FY15?
A: I am not saying that at all. I am saying a much higher growth rate than what has been achieved by Coal India in recent years is possible provided there is an all round help, concerted help from the government of India various ministry, ministry of environment forest, ministry of coal, railway infrastructure and also the state government.
The states where the coal deposits and mines are there, those states need to help in terms of land acquisition. So with all kind of concerted actions at every level Coal India can definitely improve production, which has been demonstrated in quarter three and more is possible in the coming year. Whether that leads to one billion tonne to 2019 is a matter of detailed calculation. I am not really so much deeply involved into the whole process that I can tell you. However, substantial higher growth is possible that is what I can say.
Anuj: What is your call on the e-auction process because last year the company had record margins from the e-auction? There is a report that this time around they could be a cap on e-auctions what is your take on that?
A: Caps on e-auction had to be introduced because supply to the power stations where falling short of target. Power is definitely a priority and Coal India will have to dispatch enough quantity as per the fuel supply agreement (FSA) to the power stations and then only turn to e-auctions. However, at the same time cap on e-auction can at times create a problem in terms of faster evacuation. Even this year while Coal India has achieved more than 7 percent growth in production, growth in dispatch is limited to around 4 percent.
So e-auction sometimes may help growth in evacuation and to that extent cap should not be imposed. Generally the principal should be that Coal India should first aim to meet the FSA commitment to the power stations and the e-auction quantity should not be such as to interfere in that process.
Menaka: Our understanding is that Coal India earns more via the e-auction route than the FSA supply route so not only is it an impact on dispatch but it is also an impact on profitability if the e-auction supplies are capped?
A: It is the nation's coal producers - you do not have anybody other than Coal India to meet the country's coal demand. The biggest coal demand is from the power sector and Coal India in any case is a profitable organisation. Lesser profit and more profit is fine but more important than that the power sector must receive its coal and produce power.
Menaka: Wouldn't you say the profitability of Coal India has been on the decline?
A: If the e-auction quantity falls then the year in which the fall takes place, there could be some decline in profitability. However, in subsequent year when the e-auction quantity remains capped at the same level profitability decline should not take place.
Menaka: We have already seen a profitability decline in the second quarter of this fiscal? I am not connecting this necessarily just to the e-auction cap but I am saying that from what I understand margins have come down substantially from 18 to 13 percent levels. So, profitability is already an area of concern for Coal India especially since the government wants to divest 10 percent in the company. While I understand that the power supply in this country is a priority area. We are talking about Coal India and its finance. So I am just curious to know what your assessment is of what that aspect looks like hereon.
A: That is not a very big problem to tackle. There are two things first of all if the production growth happens at a much faster space then that is going to give much additional contribution. Secondly if it needs a price adjustment for the fall in quantity or e-auction, a general price adjustment can be worked out.
Menaka: You are also discounting in this overall global fall in coal prices that has taken place over the course of the last several months?
A: Even with global fall in coal prices, Coal India prices are still cheaper than international prices after adjusting for quality so there is still scope.
Anuj: Do you think it is a right time to go for the divestment of Coal India stake and do you think there would be enough appetite for Coal India right now?
A: That will depend upon the dipstick studies with global investors and which can be done at any point in time. I am not very sure whether this is the right point in time to go for divestment because some more improvement in productivity, profitability etc has to happen before divestment takes place. With a track record of declining profitability it is not the right time for divestment.
Anuj: You believe the stock even after the rally that we have seen the company is still under valued?
A: I think so because company must first of all reverse the trend of decline in profitability that can happen in the manner in which I have just mentioned. Once that is done and that is established then only the divestment should take place to get proper value.
Menaka: Give us the sense of how you are assessing this increase in output versus the decline in prices and therefore the impact on profitability? What kind of profit growth would you expect to see Coal India do over the next couple of years keeping both of these key factors in to account?
A: If Coal India's production grows by let us say 10 percent per annum at an inflation of 5-6 percent or even less now there will be a decline in the real cost of production. As the cost is largely fixed in nature there is hardly variable cost, so with volume growth the cost per tonne comes down very fast.
If there is a 10 percent growth in coal production with not much of investment, existing investment giving rise to that kind of a growth with better efficiency and better performance, better equipment utilisation and things like that then the cost per tonne will actually come down by 4-5 percent. If that happens, margins go up straight away
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