The rules of the game change once the company faces the strobe lights of the capital market

The year was 2006. And the first meeting with miner Pratap Mukherjee took place 500 feet beneath the ground at the East Basuria mine of Bharat Coking Coal Ltd (BCCL) where this correspondent had gone on a trip. With sweat streaming down his face in tiny rivulets, Mr. Mukherjee had rued his lot, regretting that he had not heeded parental advice against taking up mining as a career. “I am doomed,” he had said in a small voice.

Four years down the passage of time, Mr. Mukherjee is a changed man. He is now fired with a new-found zeal, pumping for additional information on his holding company, Coal India Ltd. “I believe we are much in news — that we will also be given shares in our company?” Enthusiasm has now overcome his gloom and he could no longer recollect the conversation we had had almost at that spot on a February morning in 2006. Now he knows that both his company BCCL and the holding company Coal India Ltd. (CIL), are set for a take-off.

Back from the brink

But one cannot fault Mr. Mukherjee for his earlier pessimism. CIL was after all a company that came back from the brink.

A company whose raison d'etrewas to feed the huge boilers in thermal power plants with increased amounts of coal, while also looking to improve the wretched lot of the miners who spent days and nights toiling in deep and dark pits in the earth, to light up homes and run the industry.

The entity Coal India, which was formed nearly three years after nationalisation of the Indian coal industry, was tasked to address these issues — to increase the country's coal production and improve the lot of the workers. It did so with nary a concern for itself. Coal production, which grew at less than two per cent in the pre-nationalisation days, started growing at a compounded annual growth rate (CAGR) of 5 per cent. Workers' wages increased by 80 per cent in a single shot without a matching increase in production. But these achievements — of getting coal at any cost — commanded its own price.

CIL's bottomline started sagging. Equity was eroded by nearly 40 per cent, with overdue debt-service liability touching Rs. 2,200 crore.

Financial restructuring

The year 1991 changed all that as the government went into a tailspin over its own finances. CIL was asked to fend for itself with budgetary support slashed to 30 per cent before being shut-off totally in 1996. But what was then a threat soon became an opportunity with the then management deciding to pick up the gauntlet. It was a crisis of existence. A financial model developed in-house by the company in 1995-96 was used to secure government approval for a financial recast which is said to have resulted in CIL emerging as a financially viable entity which subsequently emerged over a period as a tax and dividend-paying company.

Of the Rs. 2,229-crore loan and interest default, over Rs. 892 crore was waived while Rs. 904 crore of plan-loan default was converted into preferential equity. This cleaning up of the balance-sheet was itself an inflection-point for the behemoth, which could then access loan from multi-lateral institutions such as the World Bank and the Japan Bank for International Cooperation. A total of $1.06 billion was secured, of which $522 million has been availed. This in turn helped CIL buy world-class equipment which helped boost production.

The period of losses was now behind CIL. These happenings coincided with a time when coal's position as a fuel-source was being vindicated. Accounting for 75 per cent of the total thermal power-generating capacity of the country, CIL was taking small but sure steps to establish its position as the provider of the country's dominant energy source which met bulk (about 42 per cent now) of the commercial energy needs. “It is not as if we did not have any hiccups over these years, we suffered a demand-slump in 1998-99 and a production drop. In 2000-01, the company again made losses since it could not absorb the impact of a wage-revision. But having worked on our fundamentals, the base of the company was steadily becoming stronger. We could now think big,” said Partha S. Bhattacharyya, CIL Chairman, who in the 1990's had led the team that had worked out the blueprint for the financial recast and rescue plan.

CIL's turnaround did not come a day too soon. Its ability to fund its output-augmentation programme through internal resources was assuming criticality. Having just 0.8 per cent of world's known oil and natural gas resources but abundant coal reserves (105.8 billion tonnes in proven category) coal will continue to play a pivotal role in the Indian energy scene.

A crucial infrastructure like electricity is dependent on coal, with 78 per cent of the total coal produced going to various power utilities. The balance is absorbed by various other user-industries mainly steel, fertilizer and cement.

Strategic relevance

Needless to say then coal and its main producer in the country, CIL, now enjoy a position of considerable strategic relevance, especially so as India targets a higher growth trajectory.

The Indian economy is expected to grow at a rate of over 8 per cent over the next five years.

The accelerated power generation needed to support this growth rate translates into a 10 per cent rate of growth for coal demand. CIL feels that it is fully geared to meet this challenge. Not only through quantum increases in output which has risen from 69.9 million tonnes in 1973-74 to 431.3 million tonnes in 2009-10, but also by having a presence through the entire value-chain, from exploration to beneficiation, and by supplying coal at prices deeply-discounted to international prices (by about 50 per cent).

Following the announcement of the New Coal Distribution Policy in 2007, it is now incumbent on CIL to meet the country's coal demand, if necessary through imports. Charged with this responsibility, CIL is now looking at acquiring mines abroad and also picking up stakes in working mines in countries where coal demand lags supply. The ultimate objective is to import that coal into India at prices which are lower than spot prices.

Initial public offering

Uptil now all these actions took place under the watchful eyes of the government. The rules of the game change somewhat once the company faces the strobe lights of the capital market, consequent to its initial public offer. The issue is expected to raise the highest amount among offers by public sector units.

The story of the nationalised coal industry is being described as an untold story. Of a journey begun long ago but whose milestones had remained unmarked and whose songs had remained unsung.

The new path on which CIL is set to mark its footprints from August 2010, when it is planning to hit the capital market, is one which many others before it have traversed.

It remains to be seen whether the world's largest coal-company can do a victory lap around the capital markets. This may just be its biggest challenge-ever.

More In: Business | Markets