The reality in the coal pit: Did investors in Coal India mine the right facts?

Though Coal India is sitting on the largest coal reserves in the world, the dark reality is that much of its mines are located in mafia-infested land, where smuggling is the norm, not an exception

As foreign investors poured billions of dollars into the initial public offering (IPO) of Coal India Ltd (CIL), they have chosen to ignore one important fact which can blow up in the future - coal, which generates more than 70% of electricity in the country, is not only being used for India's growth but also for generating illicit income for mafias, local politicians and the Maoists - the single greatest threat to the country's internal security.

"Naxal activities are mostly concentrated in the coal belts of Jharkhand and West Bengal and it is affecting production of coal in India," former MP and trade union leader Jibon Roy told Moneylife. In effect, India's most productive mines are situated in the Maoist and mafia-dominated central and eastern parts of India - Jharkhand, Chhattisgarh, Orissa, Andhra Pradesh and West Bengal.

The Dhanbad, Jharia and Raniganj areas, where mines are operated by Bharat Coking Coal Limited (BCCL) and Eastern Coalfields (ECL), both CIL subsidiaries - are heavily affected by illegal mining. BCCL and ECL have been perpetually loss-making subsidiaries and have been referred to the Board for Industrial and Financial Reconstruction as sick companies in need of restructuring.

Mr Roy has earlier been quoted as saying that at least 10,000 mafia groups are active in coal-producing belts, mostly in CIL collieries, and plunder around five-six million tonnes of coal (worth more than Rs420 crore) every year. According to another report, about 7,20,000 tonnes of coal is smuggled every year in Jharkhand by organised syndicates of the coal mafia.

Facts like these have been ignored by institutional investors and analysts in their assumption that CIL is just another large coal company with valuations that should match and even exceed that of other large coal companies such as Peabody Energy.

The reality in the coal pit is different, according to Mr Roy. "Mafia gangs have been active in the coal industry for many years and these gangs can not work without (the) help of Maoists. If you go to the interior parts of Jharkhand, you can see thousands of cycles employed by the mafia to move coal from one place to another, and these areas are controlled by the Naxalites," said Mr Roy. "In India, about 60% of coal production is done by contractors and these contractors are easily targeted by the Naxalites," added Mr Roy.

"There are thousands of mafia groups that are active in pilferage of coal in these states. They (Naxalites and the mafia) have acquired land and abandoned mines," said Mr Roy. "These groups (the mafia) collect coal from productive mines and excavate coal from abandoned mines and bureaucrats, police and criminals are involved in the act."

The gangs, equipped with the latest weapons, are effectively active at various stages such as excavation, washing, loading and transportation of coal. Often, due to inadequate security measures and by threatening local authorities, coal trucks are diverted to other destinations by the mafia. Transporting coal over railway tracks is also not safe as fencings or walls are easily breached by these militants.

"I have seen coal-loading trucks being diverted from one place to another place under the protection of the police," added Mr Roy.

It is also reported that large amounts of coal are pilfered at Benaras-Mughalsarai and Andal yards. Local trains along the Korea-Rewa, Anadal-Sainthia, Dhanbad-Ranchi, Dhanbad-Hazaribagh, Asansol-Gaya and Asansol-Patna routes have been regularly used for pilferage of coal.

Despite the government claims that adequate action is being taken to stop illegal mining, the situation is becoming grave. As many mines are located in interior and isolated areas, routine inspections are not conducted by law-enforcement agencies. "The government is also not capable of protecting these mines," added Mr Roy.

Illegal coal mining has now become a major threat facing the nation. Along with stealing coal, some groups are also active in stealing explosives, which sources say is supplied to Naxalites. In May, the CID arrested a man with 150 gelatine sticks, used to make improvised explosive devices (IEDs) by Maoists, and an equal number of detonators. The CID claimed that the man was part of a racket that smuggled explosives from Eastern Coalfields' magazine depots and was used to supply gelatine sticks and detonators to the Maoists.

"Explosives of coal companies are targeted by the Naxalites and the mafia," confirmed Mr Roy. There is no record of stolen gelatine sticks and detonators over the years, alleges Mr Roy. Casual workers transport the gelatine sticks to collieries on cycles and vans, and pilferage often takes place at that time.

Not only organised gangs but women and children also take part in stealing of coal. Many poor people can be seen digging old mines and carrying bags of coal on their cycles.

Citing unnamed police officials, Tata Energy Research Institute's Journal of Resource, Environment and Development said that illegal mining can never be stopped entirely and some policemen receive regular payments from illegal mine operators. Mine managers also appear to be fully aware of the exact locations of large illegal operations, but overlook the practice, added the report. The illegal coal is sold at lower rates in the local market.

To restrain illegal mining, the government is trying to fill up holes of mines with stones and debris and seal off access to abandoned mines.
But tunnels are dug and the coal faces are exposed for illegal operations. Frequent accidents resulting in deaths also do not prevent people from continuing these operations.

Even though coal-producing and consuming companies are gaining mammoth profits every year, the socio-economic condition of the people living in these areas is still very poor - this incites them to pilfer coal.

However, politicians are keen to take benefit from rich coal deposits. In October 2009, Madhu Koda, former chief minister of Jharkhand, was charged with laundering money estimated at over Rs4,000 crore - a whopping 20% of the state's revenues - during his short two-year tenure at the helm.
 

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    COMMENTS

    Aakash Desai

    9 years ago

    Very good article. Looks at the other side of the coin.

    Rohit

    9 years ago

    nothing to comment on.
    Things are cristal clear from several decades.
    mafias, naxals, police, politicians, people ...whom to blaim?
    all have played a significant role for the destruction of the future generation.

    maryseven

    9 years ago

    'mafia' is the right description.

    however, it difficult to define who the 'mafia' is?

    after reading the media, one may well conclude that even the owners of cil may fall under the category!

    its a sad commentary on our own sense of nationhood and one is forced to think if we really deserved the much touted 'azadi' .

    REPLY

    Manav

    In Reply to maryseven 9 years ago

    Feel like the only RISE in the slogan INDIA SHINNING & RISING is " CORRUPTION".

    marysevens

    In Reply to Manav 9 years ago

    very true, sir!

    Earnings analysis (Q2FY11): Ashok Leyland; Canara Bank; Hind Zinc; ACC; Ambuja Cements; TCS

    Ashok Leyland margins surprise positively; lower realisation and higher costs severely dent Ambuja’s profitability; ACC margins are at historical lows; TCS delivers best volume growth in 21 quarters; Canara Bank asset quality steady; Hindustan Zinc’s realisations better than expected

    ASHOK LEYLAND Q2

    Net sales: Rs27.14 billion (expected range Rs24.89 billion-Rs28.35 billion)
    Net profit: Rs1.67 billion (expected range Rs1.34 billion-Rs2.09 billion)

    Highlights:

    •  Net sales at the higher end of the expected range; net profits somewhere in between.
    •  EBITDA margins were much higher than expected, driven by lower raw material and labour costs.
    • Interest costs were higher (but these tend to spike in this quarter driven by higher working capital requirements).
    •  Brokers have upped their volume estimates for the year.

    CANARA BANK Q2

    NII: Rs20.03 billion (expected range Rs17.06 billion-Rs18.2 billion)
    Net profit: Rs10.08 billion (expected range Rs6.38 billion-Rs10.36 billion)

    Highlights:

    • NII exceeded even the higher end of expectations. Net profit at the higher end.
    •  Lending yields were higher q-o-q and better than expected - this helped offset treasury gains.
    • Treasury income fell. Fee income registered some growth (in line).
    • Cost of deposits was stable.
    • Loan growth was 22%, a little on the higher side of expectations; infrastructure 63%, housing 42% growth.
    •  Net NPLs increased a bit q-o-q.

    HINDUSTAN ZINC Q2

    Net sales: Rs22.01 billion (expected range Rs19.93 billion-Rs22.34 billion)
    Net profit: Rs9.5 billion (expected range Rs8.64 billion-Rs10.24 billion)

    Highlights:

    • Both profit and sales at the higher end of expectations.
    •  Zinc realisations were higher, both q-o-q and y-o-y, positive considering zinc prices fell 2% q-o-q.
    • Even volumes were up both y-o-y and q-o-q; growth was expected to be flattish q-o-q.
    • However, cost of production increased significantly too - net cost of production for zinc increased by 21% y-o-y to $977/ tonne - the company said this was because of higher power and fuel costs and higher stripping costs at its mines.
    • Updates: Its 100ktpa lead smelter at Dariba (Rajasthan) is likely to be commissioned by the end of December (which means there is a quarter's delay). After this, Hindustan Zinc will become the world's largest integrated lead-zinc producer with a total capacity of 1,064ktpa. Mine development at the Sindesar Khrud Mine is on schedule. The mill at this mine will also start by the end of December. Its silver refining capacity will touch 500 tonnes by March 2014 (company estimates) and since the refining costs are negligible, realisations will mostly flow straight to its earnings (it had produced about 140 tonnes of silver in FY10).

    ACC Q3

    Net sales: Rs16.37 billion (expected range Rs16.60 billion-Rs18.32 billion)
    Net profit: Rs1 billion (expected range Rs1.72 billion-Rs2.64 billion)

    Highlights:

    •  Both net sales and profit lower than even the lower end of expectations.
    • Margins are at historical lows.
    •  Volumes were slightly higher than expected but realisations dropped higher than expected.
    • Raw material costs were much higher than expected which the management says is because of higher costs for slag and fly ash; power and fuel costs were stable.
    • Market share decline continued - now at 10%.
    • Some volume benefits from its 2.8mtpa Karnataka plant may flow through in the December quarter.
    •  Prices have declined across all markets but the decline in north and central India has hit ACC the most.
    •  Analysts expect some seasonal uptick in the December quarter.

    AMBUJA CEMENTS Q3

    Net sales: Rs15.64 billion (expected rangeRs15.50 billion-Rs16.27 billion)
    Net profit: Rs1.52 billion (expected rangeRs1.60 billion-Rs2.77 billion)

    Highlights:

    • Revenues were at the lower end of the expected range while profits were even below the lower range.
    •  Realisation and profitability per tonne was sharply down - realisations were much weaker than even the lowest estimates; this was mainly because of a sharp fall in prices in the west where it sells 40% of its output.
    • Power & fuel costs were up due to higher imported coal costs and higher manufacturing of clinker.
    • Volume growth was in line with expectations with year-to-date growth at 7% and this quarter's growth at 5% y-o-y.
    •  A transport strike at its Suli and Rauri plants in Himachal Pradesh will dent volumes in the December quarter.

    TCS Q2

    Net sales: Rs92.86 billion (expected range Rs87.44 billion-Rs89.04 billion)
    Net sales: $2 billion (expected range $1.88 billion-$1.93 billion)
    Net profit: Rs21.07 billion (expected range Rs19.52 billion-Rs25.90 billion)

    Highlights:

    • Massive outperformance at the net sales level driven by 11% volume growth (the highest in 21 quarters) - energy & utilities grew more than 40%; Europe revenues were up 20%.
    •  Net profit showed healthy growth.
    • Its EBITDA margin is now almost level with Infosys.
    • Management said they have a good deal pipeline; clients are investing in cost reduction; client budgets (preliminary) are encouraging.
    •  FY11 hiring guidance raised to 50,000 from 40,000.
    • Utilisation was up 300bps to 78%.
    •  Attrition remains the lowest in the industry.

    (This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).
     

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    Five bull factors that affect the market
    Except for the ‘secondary corrections’, which may happen in the future, the market appears to be on the rise
     
    There are five major factors which affect stock markets: economic, monetary, fundamental, technical and psychological. Let's look at the current market condition based on these five factors.
     
    Technical Factors: The market is looking positive, technically. The Nifty made an all-time high of 6,357 in January 2008 from where it crashed to 2,520 in March 2009. From there, the new bull market started and it touched a high of 5,182 in October 2009.
     
    However, it consolidated at that level, moving in a narrow range of 5% to 8% over 11 months. In September 2010, the Nifty shot out of this narrow range and is approaching an all important level of 6,130. The market might decide to correct from there or keep rising. If it does correct, it would be a boon for long-term investors because it will be a secondary correction of the primary bull market. The correction could take the market to, say, around 5,400 or, in the worst case, to 5,050. These levels would be an excellent buying opportunity. In the second case, the market would break through the important resistance of 6,130 and would very soon make a new high and, most probably, move on to close to 7,000 over the next few weeks or even months and may correct after that.
     
    Fundamental Factors: The Sensex P/E ratio is 15.8x FY2011-12E earnings which are at a 10% premium to the long-term 10-year average. The Market-cap/GDP ratio is at 1.1x which is below its all-time high of 1.8x touched in January 2008. The earnings yield ratio of the Sensex is 5.3% compared to 8% yield on bonds (10-year G-Sec) and the earnings yield/bond yield ratio is 0.66x as compared to the long-term 15-year average of 0.88x. The Sensex P/E is at a premium of 30% compared to other emerging markets. All this indicates that, currently, the market is fully valued or slightly overvalued. Is this over-valuation justified? The positive factors which might support valuations are: GDP growth of 8% to 9%; implementation of key reforms like the GST, Direct Taxes Code and oil pricing mechanism; FII inflows; bank credit growth; boom in capital expenditure, private consumption and corporate dividend payout; and a stable political regime. The negative factors are: fiscal deficit; higher inflation; social unrest; and Maoist attacks.
     
    Macro-economic Factors: Macro-economic factors are important in predicting long-term returns but not really helpful in predicting short-term price movements. In fact, often, it is the opposite, i.e., the stock market is the barometer of the economy and signals in advance how the economy would perform. In January 2008, when everything appeared rosy and all forecasts of the economy were bullish, the stock markets were telling us (in fact, screaming at us by hitting lower circuits) that the situation was not as rosy as it appeared to be. First, the stock market corrected and then the economy slowed down.
     
    Monetary Factors: We are close to the end of hardening of the short-term money-market rates; long-term rates are anyway steady, which is good news for equities. Hence, currently, the monetary factors are positive as far as equities are concerned.
     
    Psychological Factors: Unlike the last time, when the Sensex hit 20,000 or the Nifty hit 6,000, there is not much euphoria, at present. The market has actually, and literally, climbed a wall of worry to touch these levels. There has been very narrow participation. This means that we have certainly not reached a peak. Hence, the market is well placed as far as psychological factors are concerned and it has to go to much higher levels until the current fear gets converted to greed and we reach some kind of psychological peak of thoughts, words, views and action.
     
    In sum, barring the 'secondary corrections' which might happen at the current levels or around 7,000, the market will remain bullish.
     
    (Mehrab Irani is an investment manager with Tata Investment Corporation Ltd. He has nine years of experience in investment research, portfolio management and investment banking. The views are personal.)
     
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    COMMENTS

    k a prasanna

    9 years ago

    Most important factor - FIIs are here to make money, not for charity. Once they achieve their desired percentage, they start selling the shares then market will fall like pack of cards. FIIs are here because US and European economies are not doing well. Slight improvement in their economy is enough to pull out money from here. There will be sharp correction here.

    Narendra Doshi

    9 years ago

    It will be interesting to comeback to this forecast & analysis once it is achieved, if & when, & then we will have to thank Mehrab Irani by those who believed & acted accordingly, now.

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