CIL Losing Its ‘Black Gold’ Shimmer

Last Friday, the Prime Minister’s Office (PMO) agreed to scale down the trigger level of guaranteed coal supply for Coal India Ltd (CIL) to 65 per cent. However, CIL has to pay penalty equivalent to 10 per cent of the shortfall value in case of shortfall in supply to power producers. As such, power producers such as NTPC, Damodar Valley Corp (DVC) and some private sector companies seem to have agreed to this fuel supply agreement (FSA) as the trigger level of 65 per cent for the first three years will rise to 72 per cent in the fourth year and 80 per cent in the fifth year under the terms laid therein.

Earlier, in April, the PMO forced CIL to sign FSAs with 80 per cent trigger level. The PMO i.e. the government was required to intervene in state-run CIL’s business decisions as a severe shortage of coal was hurting power producers and threatening to slow down industrial growth. The government, struggling with a slowing economy, is now pushing the CIL to boost output and help power plants that are running below their capacity.

However, the independent directors on the CIL board repeatedly opposed the move due to CIL’s incapability to meet such a high trigger level as this FSA would have gone against the company's interest due to huge penalties. Further, under this agreement, there is no clear picture about the coal price at which CIL’s customers will have to shell out. CIL is already facing problems related to the acquisition of land and environmental clearances for the additional mining area. In 2011-12, CIL produced 435.84 million tones (MT) of coal, up by just 1 per cent from the previous year and thus failed to meet its target. The company has set a target of producing 468.74 MT of coal for 2012-13 in view of the various hurdles that lie ahead of it. 

Considering the heavy domestic demand for coal, CIL is expecting a considerable shortfall in order to meet the minimum guaranteed coal supply to power producers. To overcome this shortfall, CIL needs to import the remaining coal requirement which will put pressure on its financials. Further, though CIL has been allotted various coal blocks, the company is unable to grow its mining activity and increase coal production due to delay in land acquisition and restriction of mining in those areas. Out of the 195 blocks allocated to CIL, only 29 have started production. 

Hence the government needs to treat the CIL as an independent entity by not interfering or influencing CIL’s business decisions so that CIL will be able to maintain its profitable status in the future. The government’s intervention has thus caused underperformance of CIL’s stock. Meanwhile, investors may soon start shedding the shine of ‘black gold’ despite CIL enjoying 80 per cent of the market share in India.