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Coal sector should be de-nationalised: Ex-CIL chairman

Partha Bhattacharya feels competition in the coal mining space will aid better production.

There’s a lot of buzz that the new government may look at breaking up Coal India into several smaller units and perhaps may explore other ways in which productivity may improve and the company is able to attract more foreign inflows. Partha Bhattacharya, Former Chairman of Coal India (CIL) believes that the coal sector should be denationalized.

Coal India is not able to meet the burgeoning power demand and the captive coal miners contribute only 8 percent to the total coal production. Even none of the state governments are core competent in coal mining, Bhattacharya told CNBC-TV18. He feels competition in the coal mining space will aid better production and expects supply boost in the next 5-7 years if the sector is opened up to private players. Oscar Veldhuijzen, Partner at TCI Fund Management, which is one of the largest investors in Coal India, feels that replacing imports with domestic coal will be profitable for the country, adding that faster environmental clearances will aid Coal India’s production. He believes the Narendra Modi government will focus on better coal availability.
Though he expects changes in Coal India management, Veldhuijzen does not see breaking of its monopoly as a worrying sign, nor does he think it to be counterproductive if the government retains its control on the company. Below is the transcript of Partha Bhattacharya and Oscar Veldhuijzen’s interview with CNBC-TV18.

Q: All this buzz that probably Coal India is going to get broken up, you tell us which is the best way to increase coal output? Is it that you break up Coal India or is it that you should denationalize the sector?

Bhattacharya: I have always felt that it is time that we denationalize it because opening up of the sector is the most crucial step that the new government can take to bring in multiple players, players with core competence in coal mining and that can make all the difference. Let me give you a little background of this. The fact that Coal India will not be able to meet the country’s coal demand if the power sector goes for accelerated capacity addition, was very clear in early 90s and that is the reason the coal mine’s Nationalization Amendment Act was enacted in 1993 but the scope of that Act was to induct players through the captive mining route, captive end user route. Captive end-users doing coal mining is not a model which has seen great success in any part of the world and today after 20 years, what we find is the contribution of that sector captive coal miners is just about 8 percent of the total production. So very clearly that has not succeeded. Incidentally the bill for repeal of coal mine’s Nationalization Act was introduced by the National Democratic Alliance (NDA) government in 2000. In 2000, it was done but there was a huge resistance and the resistance possibly was because of the fact that Coal India at that time was still loss-making, it had accumulated losses in the balance sheet and the feeling was that it will be swept away through competition. I don’t subscribe to the view that Coal India will be swept away against competition against global majors because when the initial public offering (IPO) was done in 2010, it came out absolutely flying high.

Q: Is your argument therefore that because the NDA was the one which first introduced the repeal of the act, it’s the best course to follow and that is the best course you are expecting now that Coal India is in a better position to weather the competition?

Bhattacharya: Absolutely.

Q: Denationalise should be the mantra?

Bhattacharya: Should be the mantra in transparent process of allocating the block whether through auctions etc to large coal mining companies, global mining companies. We should have at least half-a-dozen Coal Indias operating in India and in that situation, breaking up Coal India may not be ideal because we should have a strong domestic player as well.

Q: That is the point that an analyst was also making that it would be very hard to implement the break-up of Coal India, divide the ownership etc. Do you think this was something that someone had pointed out and perhaps there could be an introduction of some sort of incentive structure.

Bhattacharya: The problem is in any of the other routes, you are not getting players with core competence in coal mining. None of the state governments have great competence in mining coal -- coal mining has technological challenges, safety challenges, all kinds of challenges are there. It is not so very easy that anybody can do coal mining. So that aspect is somewhat undermined in either doing it through captive mining route or asking the state governments to get into mining. You need large mines, you need large technological competence to do mining because the blocks are becoming more and more difficult. They are becoming more and more challenging. Although India has huge coal resources, we are sitting on resources close to USD 300 billion tonne, there is no need for India to suffer from coal shortage. If rightly implemented, right policies, right number of players with core competence, I am quite sure that the scenario can be changed in a five-seven year kind of a time span.

Q: PSU stocks including Coal India have run up expecting big things from the new Prime Minister, what are your expectations from the new PM, specifically with respect to Coal India?

Veldhuijzen: It is great news for India and investors in Indian stocks. Narendra Modi is focused on making power available to all people of India. In order to achieve that, he will have to dramatically increase the production and availability of coal to power plants. In order to achieve this, he will need to accelerate environmental approvals and involve the private sector to accelerate the coal production. Now the involvement of the private sector will only be possible if that is happening at an attractive rate of return and in order to achieve that, they will have to move coal prices up in order to offer attractive returns. We also probably are going to see some management changes in order to boost the quality and reduce corruption.

Q: Modi is known not to privatise some of these government companies and in a zeal to supply cheap power, he perhaps will keep the coal prices low, would that worry you?

Veldhuijzen: I don’t think it is necessarily counterproductive if the government remains in control of Coal India. What is required is just an improvement and the better quality management of Coal India, reduction of corruption, perhaps the involvement of the private sector in terms of mining so not necessarily private mining companies but having private companies being involved in the underground mining. So having the government involved is not necessarily a problem and if the prices are not being raised then we certainly need to see an extreme or massive improvement in efficiency for some of these mines which are loss making at the moment.

Q:  I do not know if you have heard the former Chairman of Coal India speaking to us, he thinks that the best option is to denationalize coal which means private companies would be allowed. In that case, Coal India’s monopoly would get broken, would that worry you?

Veldhuijzen: No, not at all. It will also mean that Coal India will have less pushback so to say. But again it all depends on the new management in terms of what their priorities are and what their commitments are. So it is hard to see how this will unfold but from our point of view, it is hard to see things getting worse from where they are given that Coal India is sitting on so many reserves and the strong balance sheet. There is massive potential of a sleeping giant for it to improve its production and profitability.

Q: You earlier told us a lot of steps. According to you what are the low hanging fruits in terms of reforming Coal India?

Veldhuijzen: I think one of the priorities is to roll out the washeries. It is not very complicated to set up washeries which would improve the quality of coal and reduce the environmental burden but also de-bottleneck that the burden on the road capacity which is limited as we all know.

Q: Will you add to your holdings in Coal India now that you expect better times?

Veldhuijzen: All I can say is that Coal India offers enormous intrinsic value and probability that there will be a lot. Hope only increased now that Mr Modi has elected. So everybody has to up their own mind, it might take some time so I think it is a very suitable investment for long-term investors. That is for sure.

Coal India stock price On May 23, 2014, at 11:45 hrs Coal India was quoting at Rs 393.35, up Rs 3.40, or 0.87 percent. The 52-week high of the share was Rs 401.00 and the 52-week low was Rs 238.35. The company's trailing 12-month (TTM) EPS was at Rs 26.41 per share as per the quarter ended December 2013. The stock's price-to-earnings (P/E) ratio was 14.89. The latest book value of the company is Rs 32.48 per share. At current value, the price-to-book value of the company is 12.11.

Source: Moneycontrol