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Why Coal India's Profits May Continue To Suffer

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For the sake of explanation, world’s largest coal miner, Coal India Ltd (CIL) can very well attribute the 18 per cent decline in its net profits - to Rs 4,434 crore for the January-March period - to a one-time write-off. But the public sector behemoth, which is being considered for a massive restructuring by the new government, will need to fix a lot of systemic problems if it has to maintain its profitability in the coming months.

Here is why.

While CIL claims that the decline in profits happened due to a write-off of Rs 876 crore as settlement for a quality dispute with its largest customer National Thermal Power Corporation, the fact remains that despite various claims, the company has failed to ramp up its production over the last two years.

Production and sales by volume during the March quarter at 143.22 mt and 129.94 mt, respectively, were flat compared with last year. For the full year, the company produced 462.42 mt of coal—20 mt short of its target, but marginally higher than its previous year’s output of 452.21 mt.

Now, let us look at the company’s production for FY14. CIL which accounts for over 80 per cent of the domestic coal production missed its output target of 482 MT in the last fiscal year and just produced 462 MT coal.

A look at FY13 tells the same story. The company produced 452.5 MT coal, short of the goal of 464 MT in that year.

It’s not only the inability to ramp up domestic production that is troubling CIL. Though flush with huge reserves, it has not managed to acquire significant overseas assets (just two acquisitions so far), an apparent sign of the company management’s inability to take quick decisions when it comes to aggressive biddings against other international companies.

The company has also failed to acquire new technologies to exploit underground mines, say experts.

Even though the company claims that more than technology, environment hurdles stop it from increasing production, but the fact remains that adopting clean technologies has not been the CIL’s top priorities.

The decision of Narsing Rao, CMD, CIL to quit his tenure mid way will add to woes of the company in taking decisions which is used to enjoying its monopoly in the market, industry observers say.

The only hope for the company is visible in the prospect of government preparing a plan to give more power to CIL’s subsidiaries. Trade unions, which otherwise have been dead against any disinvestment in CIL have shown positive signs on this issue. Unleashing the power of CIL’s subsidiaries is important for a behemoth finding it tough to fight its lethargy.

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