Companies & Sectors
Coal India investors face the dark reality

Heavily controlled by the government, CIL will not be able to increase prices or increase production easily. This is not what smart investors and analysts had bargained for

Coal India Limited (CIL), the world's largest coal producer, would not be able to increase coal prices in the backdrop of spiralling domestic inflation, even as low production and uncertainty over environment clearances may affect CIL's prospects in 2011, say experts. If CIL is unable to increase production and cannot increase prices, it will undermine high hopes of institutional investors who were desperate to buy CIL's share in the Initial Public Offering in November, assuming that CIL-a monopoly producer of coal-would raise prices in tandem with rising international prices and to cover rising costs.

Last year, CIL raised about Rs15,000 crore from the market, taking the help of credit ratings and on assumptions of rising production targets and price hikes.

However, the state-owned company has been under pressure on several fronts, with environment minister Jairam Ramesh is implementing stringent norms for mining coal which has forced CIL to revise its production target, while a wage revision that will take effect in July will also reduce profits.
CIL, which accounts for around 80% of the country's coal production, has been severely affected by the imposition of Comprehensive Environmental Pollution Index (CEPI) on many of its coal blocks.

Now, CIL has revised its production target for the current financial year to 444.50 million tonnes, which is 3.5% lower than the previous target. For FY12,  CIL has lowered the production target by 8% to 447.50 million tonnes.
"The company has landed in a tough situation. Many projects are under the scanner of the Ministry of Environment and Forests (MoEF) which has hampered its production target," said an analyst with a Mumbai-based research firm. "Secondly, the company's wage cost will be very high once the hike comes into effect in July. And third, being a state-owned company it would find it nearly impossible to hike coal prices when inflation rates are very high."

The Coal India IPO was oversubscribed 15.3 times, as investors took a cue from the '5/5' grade it received from credit rating agencies. Leading credit rating agencies such as CRISIL Research and ICRA (an associate of Moody's Investor Services), and some others assigned the CIL IPO a grade '5/5', citing 'strong' fundamentals. The 'strong' fundamentals were decided on the basis of the company's dominant position, coal reserves and balance sheet.

One of the key assumptions with respect to Coal India's high valuation was possible price hikes. In a recent television interview, Partha S Bhattacharyya, chairman, CIL, said that the company had started the consultation process on price increases. But being a state-owned provider of around 80% of the fuel for the country's power sector, the Indian government will not allow CIL to implement a huge price hike, which is necessary at this point to boost the sentiment of investors.

Despite several measures, the inflation rate remains stubbornly high and if coal prices are allowed to go up the government would be under further pressure. An increase in coal prices would push power producers to increase charges and that would impact industrial growth.
All this is bad news for institutional investors, who were dying to get a piece of Coal India in the November IPO. Foreign investors owned 14.72 crore shares or 5.7% of the company till 14th January, up from 3.3% held soon after the IPO on 30th October. Filings indicate that retail investors' shareholding fell during the period from 4.1% to 1.8%. The revision of the production target has also shaken the trust of foreign investors in CIL. Legg Mason Funds, DSP Blackrock and other investors have sold their shares.

On debut, the company's shares surged around 40%. The stock price traded as high as Rs357 on 5th November, the second day of the stock listing, and today it is hovering at around Rs304.

Analysts and credit rating agencies did not bother to pay attention to CIL's true nature of operations, that it was a government-controlled company, as well as the environmental issues. On 14th February, CIL reported a net profit of Rs26.26 billion for the third quarter ended December 2010, on sales of Rs126.92 billion. However, it did not provide any comparative financial figures. Production was up by a marginal 2% to 113.85 million tonnes, while supplies for its consumers including power utilities were up by just 3% to 110.52 million tonnes.

According to a report by JP Morgan, "CIL indicated that its production target of 447 million tonnes for FY12 assumed that CEPI would continue after March 2011. But even if CEPI is removed, the company would not see a material increase from 447mt levels as the real impact would flow through only in the second half of FY12."

It is also said that several ministries, including coal, commerce and finance, have been pressuring Jairam Ramesh to soften the permission for coal projects. More than 150 projects of CIL are stuck due to want of clearances.

"Further, given the off-take problems, it would result only in an increase in inventory. If CEPI continues beyond FY12, production growth of 5% would be difficult," JP Morgan said.
According to the report, wagon availability for transporting coal remained a constraint with no growth in January-March availability. Against this backdrop, a 5% growth in despatches would be difficult to achieve.
"Coal India has highlighted that if the railway infrastructure problem does not get solved, they would look at setting up captive power plants," the report said.


SBI bonds: An offer worth considering?

Investors in SBI bonds last October made instant profits with the bonds listing at a premium of close to 5%. Even if it does not list at a premium due to the rising interest rate scenario, retail investors will gain from the offer

State Bank of India (SBI) bonds for retail investors (subscription of Rs10,000 to Rs5 lakh) is offering better rates of 9.75%-9.95% for 10 and 15 years respectively. The interest rates offered by SBI (deposit rates) for 5-10 years have been steady at 8.50%-8.75% for a long time.

For a long-term conservative investor, the offered bond rates are attractive. Moreover, two credit rating agencies have stamped 'AAA' on the bonds and SBI itself is a blue chip bank. The previous bond offering was an instant hit with investors, with the issue being oversubscribed around 17 times.

SBI bank deposits fetch maximum interest of 9.25% for 555 and 1,000 days. The rate reduces to 8.25%-8.75% for a period between 555 and 1,000 days. Public sector banks, private banks and even cooperative banks are offering lower rates than SBI, for a fixed deposit (maximum rate of 9.25%). An investor looking for steady income without the hassles of fluctuating interest rate scenarios over the long term can benefit from the bond offering.

Even if the interest is not compounded and given to you every year, you can reinvest the interest in other investment options to improve your returns.

However, there are no Income-Tax (I-T) benefits, but neither do bank deposit interests fetch tax benefits above a certain level. Interest from non-convertible debentures (NCBs) is taxable even if there is no TDS (Tax Deduction at Source).

There are tax-saving bonds (infrastructure bonds) available in the market for tax savings under 80CCF (under the I-T Act), but they offer lower interest rates. They are mainly utilised for investing Rs20,000-that is over the Rs1-lakh limit for savings under 80C of the I-T Act.

One should know, interest generated by infrastructure bonds is also taxable.  


SBI Bonds

SBI Bank deposits

Interest rate

9.75% for 10 years; 9.95% for 15 years for retail investors

555 days and 1000 days— 9.25%; 8.50%-8.75% between 5 and 10 years

Cumulative option

Not available. Take the interest and invest in other investment options to improve your returns


Call option

Available. SBI can call back the 10-year bond after 5 years and the 15-year bond after 10 years without offering additional interest

Not available

Option to redeem before maturity

Not available. You can sell these bonds in the secondary market at prevailing market rates. If interest rates go down, the price of the bond will increase and vice-versa

The interest rate is based on the date on which you open the deposit. It is 1% less than the interest rate for the duration of the deposit.

Deposit insurance

Not available. These cannot be used as collateral for a loan

Available. Up to Rs1 lakh

Demat needed



Tax benefit



SBI plans to raise Rs1,000 crore through this bond issue. The bonds open for subscription on 21st February and close on 28th February. SBI has already provisioned for an oversubscription of the issue, up to an additional amount of Rs1,000 crore, taking the (total possible) amount on offer to Rs2,000 crore.




6 years ago

Though how many attemps by whoever nobody is going to hear retail vioice.The looting & making fools will contine forever.

amarish shah

6 years ago

you can sell the sbi bonds at currnet rate and purchase 12% tata capital bonds where you will have a yield of is available at rs. 1051.00
you can sell the same in the market


6 years ago

Pls advice how a retail investor can sell the bond in the secondary market? I'm not aware of any online platform...I've demat account though....pls advice!!!!


Hemant Bhatia

In Reply to Yuvaraj 6 years ago

You can sell them through your share broker at NSE OR BSE Exchanges,just like selling your shares in the market.


In Reply to Hemant Bhatia 6 years ago

I buy/sell shares through my reliance money account. I believe this bond will be held in one's demat account. Can't one sell it online? Or will investors be given a bond certificate to sell it through share brokers?


In Reply to Yuvaraj 6 years ago

yes you can sell it online,just like you sell your shares in demat form.


6 years ago

Can you invest online?


Raj Pradhan

In Reply to Suresh 6 years ago

Not allowed for this issue


6 years ago

Dear Raj,
The maximum application size for Retail investors is Rs.5 Lakhs. Is this limit for Series 3(10 Years) and Series 4(15 Years) taken together or is the limit of Rs.5 L applicable to each Series individually? Many thanks for your clarification.


Raj Pradhan

In Reply to Sundaram 6 years ago

taken together. it all goes by demat account.

RBI starts discussions with stakeholders on Malegam Report

The RBI has already invited public comments on the Malegam Panel report, which suggested among other things capping interest rate at 24% for loans extended by microfinance institutions (MFIs)

Mumbai: Reserve Bank of India (RBI) deputy governor KC Chakrabarty today said the apex bank has started discussions with all the stakeholders regarding implementation of the Malegam Committee recommendations on microfinance, reports PTI.

"This (the Malegam Report) is at the discussion stage... We have not decided anything yet," Mr Chakrabarty told reporters on the sidelines of an event here.

"Some part of the report like interest rate will be applicable from 1st April," he said.

The RBI has already invited public comments on the Malegam Panel report, which suggested among other things capping interest rate at 24% for loans extended by microfinance institutions (MFIs).

The committee, headed by the RBI's Central Board director YH Malegam, suggested that small loans cannot exceed Rs25,000 and creating a separate category of non-banking financial companies (NBFC-MFI) for the MFI sector.

The central bank constituted the committee in October last year in the wake of allegations of overcharging and use coercive recovery practices by MFIs that led to a spate of suicides in Andhra Pradesh.

The committee submitted its report on 19th January. These recommendations, the committee said, should be implemented from 1 April 2011.


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