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Coal India: Plenty of gold in black gold - Outside View by Luke Verghese
 
 
Coal India: Plenty of gold in black gold

If the parent can get the several lacklustre siblings to shift gears, and have the performers continue to hum at full pitch, then this share will be on song.

A humungous operation

It is not surprising that Coal India has been anointed with the title of a maharatna company. It is the paramount dealer in black gold after all, and it is a humungous operation to boot. It is today the largest single coal producing company in the world with a production of raw coal of 431.3 m tonnes in the fiscal year ended March 2011. (The company informs that the coal produced by Coal India in Fiscal 2011 accounted for 81.1% of all coal production in India). Conceived, I think, after the coal mines in private hands were nationalised (barring the captive collieries that the Tatas owned), the company is 37 years young as a corporate entity. In keeping with the size of its operations, the board of directors too is expansive. Including the Chairman Mr N.C. Jha, the board consists of 15 members. Among the 15 are three special invitees- ex-officio members, by virtue of their office of profit. The chairman of the board seems to wearing three hats simultaneously- that of chairman, technical director, and marketing director. He must be a whiz kid of sorts, and a jack of all trades if there is one. For his troubles, the chairman to be took home a consolidated salary and benefits of Rs 2.7 m in 2010-11!

Becoming more action oriented

As the scene is played out, Coal India is a holding company. The coal production operations are primarily carried out through seven of its wholly owned subsidiaries in India. In addition, one subsidiary, CMPDIL, carries out exploration activities for the subsidiaries and provides technical and consultancy services to the company and to third party clients. It is also the world's largest corporate employer with manpower strength of 383,000 employees. (Thus statistically speaking, the production of coal per employee works out to 1,126 tonnes in fiscal 2011.) It is also nice to note that the company is making a conscientious effort at scaling up employee productivity on an ongoing basis. In the year 2001-02 it produced 280 m tonnes of raw coal, on a year-end employee strength of 520,000. The figures for 2010-11 are 431 m and 383,000. In terms of tonnes mined per employee it makes for a 100% increment.

Spreading its wings

The parent has also established a wholly owned subsidiary in Mozambique to pursue coal mining operations in that country. The company principally makes raw coal, primarily of the non-coking variety. To give an indication of the size of its operations, the parent and its subsidiaries currently have 149 ongoing projects having a sanctioned capacity of 438.7 m tonnes per year and a total sanctioned capital of Rs 260 bn. On fruition several years down the line, it will on paper more than double its manufactured output. The company has also identified 18 abandoned mines with estimated reserves of over 1,600 m tonnes of high quality coking coal, and thermal coal, for developing under a joint venture with internationally reputed global underground mining companies. The Coal Videsh division of CIL is also pursuing deals abroad to acquire a stake in Greenfield coal companies in Australia, USA, South Africa and Indonesia. That is a lot of action in the offing. And given its low gearing, raising funds should not be more than a laugh.

The public offering of shares

Readers are well aware that Coal India-the holding company of the group made an initial offering of capital in October 2010, the largest IPO by far in the Indian firmament. The offer was a sale of shares by its owners, the Government of India, in an issue labelled as selling the family silver. The offer was for 631,636,440 shares of Rs 10 each and the issue raised the equivalent of US$ 27 bn or Rs 2,400 bn, or some such. The shares were allotted at a price of Rs 245 per share. Following the issue of capital, the central government holds 90% of the expanded capital base of Rs 63.1 bn. The public holding is a mere 1.6%. The number of shares issued by it is so humungous that the company has got it all wrong in the schedule showing the number of shares in physical and dematerialised form. It has forgotten to add an extra zero to the number of shares! The company has also in its first annual report post public issue published voluminous details of production statistics and such like for a ten year period. They are too numerous to comment on. But there is one statistic that the company has published for its last three years working which stands out.

The standout statistic (Standalone financials)

It deals with the highlights of the performance of Coal India including its subsidiaries in the year 2010-11 compared to the previous two years. In 2008-09 the company recorded a gross profit of Rs 59 bn on a turnover of Rs 461 bn or a gross profit to sales ratio of 12.8%. In the year prior to the maiden public issue of shares, the figures were Rs 141 bn and Rs 522 bn. The gross profit ratio rose to 27%. In the year of the public issue the respective figures were 165 bn, Rs 602 bn and 27.4%. In the latter two years it produced an identical volume of 431 m tonnes of coal, while in 2008-09 the production was 404 m tonnes. It would appear that in the latter two years the company was spruced up for the issue of capital to the public. The maintenance of an identical gross profit margin and the higher margins in 2009-10 and 2010-11 relative to the performance in 2008-09 appears to be a calculated effort at ingratiating itself with the public shareholders by pen pushing, rather than the company suddenly becoming more efficient at what it is doing.

The second largest equity base

The standalone company per se is a humungous operation in every sense of the term. In the listing of Capital Market Magazine of 1,800 large listed corporate in its Corporate Scoreboard column, it boasts the second largest paid up equity capital of Rs 63.1 bn after National Thermal Power Corporation with a paid up equity capital of Rs 82.4 bn. Coming in at third place is Power Grid Corporation with a equity base of Rs 46.2 bn. At end March 2011 it had reserves and surplus of Rs 115 bn and cash and bank balances of Rs 116.5 bn. The gross block stood at Rs 3.8 bn, but the accumulated depreciation swallowed up as much as 68% of the gross block. The book value of its investment portfolio logged in at Rs 63.2 bn. Loan funds at year end were comparatively piggly wiggly and stood at Rs 13.7 bn. This loan figure is however completely dwarfed by its cash hoard of Rs 117 bn at year end.

How it earns its bread

Its income generation is truly fantabulous and is of the fairy tale variety. It is very well structured that is for sure. In 2010-11 it generated a top line including other income of Rs 55 bn against Rs 46 bn previously. But it is the makeup of these revenues that makes it all worthwhile. The company affects direct sales too- but such revenues at Rs 4.1 bn account for only 7.5% of the gross revenues. The game changer is the generation of Other Income. With receipts of Rs 50.8 bn it accounts for 92.3% of all income. Then there is a curious entry going by the name of Accretion of Stock at Rs 85 m. This adds up to another 0.1%. Strictly speaking this is a bum rap, and accretion of stock should logically be deducted from materials consumed. But there is no such entry of materials consumed in the expenditure side of the revenue equation. So how does it generate the sales?

It sold 1.1 m tonnes of raw coal worth Rs 4.9 bn, or at an average price of Rs 4,196 per tonne. It also generated a sum of Rs 64 m in the form of Other Recoveries. Then there are a plethora of central and state taxes under innumerable heads, that it perforce has to pay (including two payments labelled as stowing excise duties and excise duty- mark the different spellings please) which it has deducted to arrive at the net revenue. (On the face of it, the swath of taxes that the sarkar has drummed up under a wide variety of nomenclatures appears to be nothing short of a daylight robbery exercise or something by our elected representatives! Smelling easy lucre, some states like Madhya Pradesh have started levying yet other land taxes which the company has challenged in the courts and the matter is presently sub-judice). But, significantly, it does not appear to have incurred any direct expenditure towards mining the coal that it sold. What magic mantra did it conjure up to generate the coal that it sold? But let that be. The other incomes consists of in the main, bank interest income of Rs 6.2 bn, and guess what, dividends from subsidiaries amounting to Rs 42.3 bn. Making an entry is an item called apex office charges from subsidiaries amounting to Rs 1.9 bn.

Can it have an encore each year? All these major heads of account cannot be counted upon to make a repeat performance every year given the very nature of their generation. The bank balances can disappear if the company splurges on capital expenditure- which it may now do since the company is in the public domain. On the other hand it may choose to continue being a holding company. The dividends from its subsidiaries are something that the parent can manipulate at will and also depends on the coal prices that the siblings will be allowed to levy on the consumer by the apex ministry. One may however add here that the dividend return on its investments in its subsidiaries amounts to a bomb. That is to say on an equity investment base of Rs 63.2 bn it received dividends to the tune of Rs 42.3 bn. And that too considering that two of its major subsidiaries (out of the nine subsidiaries in total) Bharat Coking Coal Ltd and Eastern Coalfields Ltd have negative reserves wise gone belly up. The last mentioned income is also a managed figure, and depends on how much it decides to squeeze its siblings to part with. This is a rather nice way to earn ones living.

Given the nature of the incomes it also stands to reason that it incurs bare bone expenses on revenue account. And so it is. The total revenue expenses amount to Rs 7.8 bn. The largest item of revenue expenditure is employee handouts at Rs 2.4 bn (on a consolidated basis the employee handouts averaged Rs 4.75 lacs per year) followed by of all things, interest expenditure of Rs 2 bn. The latter represents interest that it paid to its subsidiaries. Consequently, the pre-tax profit trooped in at Rs 47 bn. The best part of earning revenues in this manner is that you don't get to pay any taxes on your income. The tax provision is a mere Rs 2.2 bn. The point is that the dividends that it receives have already been taxed in the hands of the company paying the dividend. Thus it gets to pay taxes only on its other minor incomes. The government is getting savvy at last and is now thinking very much like India Inc does it appears. And by PSU standards, the company opened the spigot with a dividend payment of Rs 24.6 bn. The government was the winner all the way taking in 90% of this outflow.

The cash flow statement

It has apparently used the indirect method (whatever that means) to prepare this statement. It generated a cash flow of Rs 24 bn from operations, and with little or no expenditure on the investment side of the equation, the company decided to splurge quite some bit on dividends. For the present it operates as a giant tooth fairy benefactor to its underlings or some such. (But, then, it is also the munificence of the underlings that makes it all possible in the first place). The loans and advances schedule reveals an outstanding loan account of Rs 83.6 bn, almost exclusively advanced to the siblings. Some Rs 942 m of these advances is shown as doubtful of recovery. It is not known which of the subsidiaries is on the defaulter list and the reasons thereof. What is interesting in this masala mix is that these funds, which are advanced either under loan account or current account etc, are given interest free. At least this is what the income receipts in the other income schedule reveals.

Some puzzling figures

There are some puzzling figures in the big picture on the loans and advances to its siblings. A separate schedule on the subject shows that the amount due from its siblings at year end amounted to only Rs 31.1 bn. This figure is arrived at after deducting dues to the subsidiaries amounting to Rs 38.6 bn. But this amount does not appear to show up separately in the liabilities side of the balance sheet. Separately, the current liabilities schedule shows that the parent owes the subsidiaries a humungous Rs 52.4 bn either under the head of funds from subsidiaries or under subsidiaries current account. It is very difficult to make any sense of these mega inter-se transactions within the group. It makes for a bizarre state of affairs if one may say so.

The siblings

This brings us to the state of affairs among its many big ticket siblings. As stated earlier the parent has nine direct subsidiaries including its Mozambique based offspring. One of its subsidiaries Mahanadi Coalfields in turn has two naam ke vaaste offspring. Eight of the nine direct subsidiaries generated revenues, and they collectively toted up revenues of Rs 502 bn, with a pre-tax profit of Rs 159 bn. All the siblings generated positive bottom-lines. Only five of the siblings deigned to pay a dividend, which when combined made for a mega figure. Two of the siblings, Eastern Coalfields and Bharat Coking Coal have negative reserves far in excess of their paid up capital, but have generated a surplus out of their current operations. The nine siblings collectively have investments of their own valued at Rs 10.6 bn.

The biggest of this lot by far in terms of turnover is South Eastern Coalfields with revenues of Rs 106.5 bn, but the biggest in terms of total assets is Mahanadi Coalfields with total assets of Rs 172 bn. Judging from the brief financials that have been appended there does not appear to be any co-relation between the total asset base of the companies and the turnover that they generate. The variances in some instances are very large. For example Mahanadi Coalfields could generate revenues of only Rs 74 bn, while South Eastern Coalfields had total assets of Rs 146 bn. The most chiselled of the lot appears to be Central Coalfields with total assets of Rs 90 bn and revenues of Rs 60 bn. These anomalies should logically be suitably addressed by the management in the annual report to the shareholders, considering that this is the only detailed communication to them over in a fiscal year.

Summing up

To sum up if the two mega companies with the negative reserves can be made to earn their keep and they too are able to contribute to the dividend kitty, and the other subsidiaries are able to perform at the same pace then the parent should be on a good wicket.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme.

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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2 Responses to "Coal India: Plenty of gold in black gold"

Naveen

Mar 8, 2012

One more point i would like to add is that SEBI need to allow FIIs only to invest in companies who follow to the dot the prevailing accounting standards or even the GAAP..

Like (2)

Naveen

Mar 8, 2012

Dear Asad,
You give a good detailed commentary. Appreciate it as always.
The retail investors of CIL, most of them, will not get to see how (who really want to see, however very few would like to out of them...as you know others are busy pricing the stock :) and we call them investors) this whole conundrum is rolling.
I guess Such (may i say all these PSUs) allow our dirty politics (of course i meant the once running them) survive for the bread and the butter Plus the wine and cheese with it. Once they are fully public , in the real sense (not cross holding) it would be a stong blow for the DIRTy part of the politics to clean up our India.

Like (2)
  
Equitymaster requests your view! Post a comment on "Coal India: Plenty of gold in black gold". Click here!
 

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