Will Coal India become the next Air India?

Is Coal India about to become the next Air India? It certainly seems that way.

A company that briefly became India's most valuable company by market capitalisation in 2011 could eventually become a bailout candidate if the government keeps up its efforts to hammer away at the company's profitability.

On paper, this is a company that should be generating piles of cash. It does currently, but it could only be a matter of time before it loses that ability.

[caption id="attachment_224324" align="alignleft" width="380" caption="Production has stagnated at the 2009-10 level of 430 million tonnes because of regulatory and environmental hurdles. Reuters"][/caption]

Coal India is India's - and the world's - largest coal producer. On paper, that's a fantastic business to be in. India's demand for coal is expected to more than triple in the next two decades on the back of increasing electricity and industrial output. Coal also accounts for more than half of the installed power generation capacity in India.

More from Economy

By all accounts, Coal India should be happily mining away.

It isn't. As things stand, the company is in a miserable bind: it can't increase production or prices, thanks to a host of shackles by the government. In fact, the only thing that seems to be consistently rising is employee wages.

Production has stagnated at the 2009-10 level of 430 million tonnes because of regulatory and environmental hurdles, which have stalled clearances for exploring new blocks.

The company has the option of importing coal, but the government won't allow it to sell coal locally at international parity prices. As this Firstpost blog notes, Coal India already sells the most discounted coal in the world.

Even if by some miracle, the company is permitted to sell imported coal at international rates (which are at least 66 percent higher than the price of coal sold at e-auctions), it would lead to an inevitable and substantial rise in power prices. That of course, is unpalatable to the government and consumers, and unlikely to happen.

In fact, in recent times, the government has been swatting down every attempt by the company to hike coal prices.

And yet, it expects the company to keep supplying coal continuously to power companies. A recent diktat from the Prime Minister's Office directed the company to enter into long-term supply contracts with power producers, and even penalises the company for any shortfalls in supply. There's even talk that coal being sold at e-auctions (one of the few ways the company is making good money right now) could be diverted to power companies.

Coal supplied at e-auctions is sold at around Rs 3,000 per tonne, while coal supplied to power companies is sold at a much lower government notified price of Rs 1,1o0 per tonne, according to this Financial Express report.

These are not the only problems. Let's not forget the Mining Bill, which aims to make coal miners share 26 percent of their profits with the local communities in the areas they undertake production.

It's almost as if the government is on a mission to try and bankrupt a company that operates in what should potentially be a lucrative sector. While its current performance remains admirable ( a 54 percent jump in net profit in the December-ended quarter), there's no question that its future profitability is slowly getting eroded.

"It is almost impossible for Coal India to comply with the dictum of the PMO and still remain a profitable public-sector undertaking. The country has failed to learn lessons from the past and is now on the verge of creating another Air India," writes SK Chand, senior fellow, energy regulation and practice at The Energy and Resources Institute (Teri), in Financial Express.

Seven years of Praful Patel financially destroyed Air India.

If the government isn't careful, cash-rich and currently profitable Coal India might soon end up in the same state in seven years.