Before the initial public offering, analysts and the CIL management were speaking of increased production and higher prices for the company’s products. However, the story has changed dramatically now
Coal India Ltd (CIL) had raised a whopping Rs15,000 crore through its initial public offering (IPO) in October last year, citing rising production and increasing prices, ambitious expansion plans, a strong balance sheet and a‘5/5’ rating.
But now, just two months after the public offering, CIL is talking about a fall in production, due to a moratorium enforced by the Ministry of Environment and Forests (MoEF) in granting clearances for mining projects in critically-polluted areas.
Besides, with inflation worrying the government, will CIL’s proposals for a price hike be accepted by the powers-that-be?
Citing Partha Bhattacharyya, chairman and managing director (CMD) of CIL, brokerage house CLSA says, “The CMD highlighted the risk of a shortfall in production targets due to a moratorium enforced by the MoEF in giving clearances for mining projects in critically-polluted areas.”
“The Comprehensive Environmental Pollution Index (CEPI) was supposed to be reviewed in October, but it has been extended till March. As a result, we clearly estimate an impact of 16 million tonnes (MT) in reduction this year (on production),” according to wire agency PTI, which quoted Mr Bhattacharya.
CIL has set itself a production target of 260.50MT in 2010-11 and it plans to produce 486.50MT of coal in 2011-12.
This disturbing news, surfacing just two months after the IPO, clearly indicates once more how rating agencies and broking firms do not look at each and every aspect of a company before making their ‘recommendations’. Agencies such as CRISIL Research and ICRA (an associate of Moody’s Investor Services), and others, assigned IPO Grade ‘5/5’ to CIL—and recommended a ‘buy’ on the public sector coal major, citing the ‘strong’ fundamentals of the company, but they did not bother to pay attention towards the true nature of operations of CIL See the earlier Moneylife article: (http://www.moneylife.in/article/4/10241.html).
The company has been accused of violating various environmental norms, a number of times. CIL’s very nature of operations is extremely risky, and has always been under the radar of the MoEF. But it was just a matter of time before the MoEF clamped down on CIL.
Since environment minister Jairam Ramesh took over the MoEF portfolio, CIL has been facing stiff opposition for its current and future projects. Mr Ramesh is strongly recommending that “dense” forests should be declared ‘no-go’ zones for mining, which will surely affect CIL’s production plans. The ministry of coal has been seeking Cabinet permission for more than 200 coal blocks. However, the MoEF has stuck to its guns.
The MoEF introduced the ‘no-go’ prohibition norms, under which mining is not allowed in areas with over 30% gross forest cover (or 10% or more in ‘weighted’ forest cover).
Before the company’s IPO was launched, research and rating firms were betting that the company would be able to hike prices three to four times over the next few years due to a proposed ramp-up in production. However, now the fall in production is poised to weigh down the company’s balance sheet. Mr Bhattacharyya, in an interview to a television channel, admitted that coal production would grow merely by 1.2%-1.3% and sales would go up by a measly 3.5%-4% till September of this year.
The company is also in not in a position to hike prices of coal to maintain its margins; any hike will increase costs of power generation—among other services—stoking inflation even further.
With CIL planning to increase the share of washed coal in the overall mix significantly over the course of the next few years, the fuel bill would rise further for coal companies.
The company is also expected to increase salaries of its employees by June this year. These expenditures will obviously dent profit margins—even as sales may not grow.
Though CIL feeds the country’s energy requirements, a question has risen over the quality of its produce.
According to the Geological Survey of India, as on 1 April 2010, the inventory of total coal resources in the country were 276.81 billion tonnes. However, out of these reserves, only 39.67% are in the ‘proven’ category, while the balance comes under the ‘inferred and indicated’ category, according to an answer provided to the Lok Sabha by the minister of state for coal, Sriprakash Jaiswal.
The Indian steel industry largely depends on imports of coking coal, as the quality of coal produced by CIL indigenously is quite inferior in comparison to these imports.
As Moneylife has reported earlier (see above link) CIL is one of the largest state-owned companies in the world, but its operations are spread over Jharkhand, Chhattisgarh, Orissa (areas where development has lagged behind the rest of the country) and in Andhra Pradesh (currently beleaguered by political turmoil) and West Bengal.
CIL has a history of illicit mining and has been targeted by the so-called ‘coal mafia’ and Naxalites. The company has been fighting various court cases. One of them involves a case alleging corruption involving a former managing director of the company.
Pantaloon Retail is running an operation that can only be maintained by a constant injection of loans. As interest rates rise, this will play havoc with the bottom-line
Shareholders of leading retail chain Pantaloon Retail should be a worried lot. The stock has fallen by a sharp 42% over just four months—from Rs517.40 on 5 October 2010 to Rs300.90 (yesterday). If these shareholders look a little bit closer, they will wonder for whom the company is being run—the shareholders or the bankers?
Research analysts tracking retail stocks say that the current high interest rate regime is the key reason for the underperformance of the stock, even as the company is planning an expansion & restructuring exercise. But is there a problem with the business model itself? Pantaloon’s turnover is erratic and it is essentially pushing sales with borrowed money.
The company’s net sales declined over the past two quarters, despite its increasing footprint and the country’s strong economic growth.
Pantaloon Retail’s net sales came down to Rs991.49 crore in the September 2010 quarter from Rs1,642.41 crore in the June quarter.
Again, profit margins have not been healthy. A large part of the company’s operating profit has been eaten up by interest cost. Consider this. The operating profit of the company was Rs78.27 crore in the June 2010 quarter. In the same quarter, the interest cost was Rs81.20 crore—more than the operating profit.
This may have been an aberration. But even in the next (September) quarter, the operating profit was Rs93.74 crore—but the interest cost was Rs41.98 crore—almost half the profit. At the cost of repetition, one must add... Shareholders should really wonder, is the company being run only for bankers?
Analysts tracking the stock say that the planned expansion & restructuring exercise is mainly through loans, which will inflict a heavy interest burden on the company in the future. Again, given the current galloping inflation rates, sales are not picking up. Hence the margins are coming under severe pressure.
Sangeeta Tripathi, senior research analyst, ShareKhan, told Moneylife: “From the fundamental perspective the company is doing well, though the stock has been hammered for no particular reason. The only issue with the company is the debt levels which are very high. There would be some part of repayment as soon as next year. The results for the December quarter would be crucial. There might be good valuations coming in from the next quarter. Overall we remain positive on the stock.”
Another research analyst says, “The company is just (coming) out of the festive (sales) season. Going forward, sales might pick up in the coming discount season expected in the month of January–February.”