Coal India plans major profit-boost exercise to stay competitive

Sumit Maitra

Faced with fall in global prices and domestic demand and also with future competition from commercial miners, Coal India has drawn up a major multi-pronged profit maximization exercise through cost rationalisation and investment projects that touches almost all operational areas from manpower to evacuation infrastructure to legacy high-cost mines.

Coal India chairman Pramod Agrawal has worked on such a strategy and detailed it before the investors’ community who are wary of the mining behemoth’s ability to face such growing challenges.

Coal Insights has pieced together details of such a strategy from multiple sources, elaborated here.

Key strategy

♦ Pricing freedom by selling superior quality coal

♦ Incremental import substitution

♦ Improve manpower productivity significantly

♦ Mechanisation of evacuation to lower costs

♦ Improved ESG compliance and disclosures

♦ Predictable capital allocation

♦ Not to invest in new mines where IRR is below 12 percent

♦ Closure of unviable mines

Cost control measures

Coal India is implementing multifaceted cost control measures, and its positive effect is already being seen.

During the first quarter of FY21, cost per ton reduced 3 percent from `1393 to `1360 per ton despite the fact that Coal India paid all the contractor labourers during the lockdown.

“Cost of production per ton reduced substantially that indicates that our cost controlling measures were slightly effected,” chairman Pramod Agrawal told analysts.

Key measures

♦ Natural attrition of manpower: 5 percent reduction in manpower annually for the next 5-10 years (from FY20 base of 2,72,445 employees)

♦ First mile connectivity and infrastructure creation to reduce costs. Currently CIL incurs Rs 3400 crore on transportation charges on coal annually. This can decline substantially with improvement of first mile connectivity by mechanization

♦ Closure of unviable mines: CIL has identified 23 mines for closure in FY21; 82 mines closed in the last 3-4 years. Even after considering all the closure costs (including labour costs), CIL will be saving to the tune of at least Rs 500 crore

♦ 158 underground mines employ 45 percent of the workforce whereas contributes 5 percent of total production

Focus on import substitution

Target: 200 mt extra sales in FY22 to substitute imports

Coal India plans to sell around 200 million tons of coal in FY22 to those users who are now importing coal.

Factoring in the high ash content of Indian coal, this would help domestic imported coal users to avoid import of 150 mt in the next financial year, the coal mining major has told analysts.

For the current year, Coal India has set a target to replace 100 mt of coal imports through domestic sources.

To sell to imported coal users, Coal India is targeting sponge iron and cement plants which can be supplied higher quality of coal which is available in ECL, CCL or SECL. As production is being ramped up for WCL, efforts are on also to target importers in WCL’s command areas, the chairman said.