CIL Should Focus On Easy Diversification Opportunity In Power Generation

Coal India Limited (CIL) is showing a strong interest in diversification, although there's more talk about it than actual implementation.

Thermal and solar power, integrated solar wafer manufacturing, bauxite mining and aluminum smelter, coal gasification, overseas coal asset acquisitions — name it and they have proposed it. 

In May this year, then chairman-designate (now chairman), P M Prasad said the company would pump Rs 91,000 crore (nearly $11 billion at current exchange) in various expansion projects by 2025-26. 

The claims are confirmed by multiple government releases. There are also media reports about the government suggesting CIL to explore electric vehicle manufacturing and building charging pods etc. 

However, the strategy behind such a wide (if not, wild) array of proposals is unclear. It is also unclear if the company has the capacity to handle fast expansion both horizontally and vertically. 

Lack of focus

Diversification and value chain integration are common business decisions. From an upstream company, the state-owned ONGC became an integrated energy player through acquisitions. In the private sector, Reliance expanded both vertically and horizontally. All such expansions, however, took place over decades. 

The problem is CIL is talking about anything and everything at the same time. And, a look at the news archives, particularly over the last one and a half decade, will prove they have been in the habit of making such announcements. Further scrutiny may prove they never had the know-how to achieve them. 

The company drafted several plans for logical expansion into coal-power generation and coal-bed methane (CBM) production since the 1990s. Both are unrealized. They acquired coal assets in Africa through a joint venture and burnt fingers.

CIL had set up the country’s first CBM pilot at Moonidih in the 1990s. In 2002, they were allocated two commercial CBM blocks in consortium with ONGC. Two decades later, CBM is still an unrealised dream. 

True, legal hurdles (in parallel production of coal and CBM) and, lack of evacuation infrastructure, held up CBM plans in the past. The legal hurdle now stands removed. The brand-new national gas grid also opened feed-in opportunities. 

Theoretically, the ground is prepared for CIL to make extra bucks from its gassy mining assets in Ranigunj-Jharia coalfields. It is to be seen, how quickly they tap the opportunity. The past records don’t make us very hopeful. 

For all practical purposes, expansion to thermal power generation was the easiest task for CIL. For a company that acquires thousands of acres of land every year, managing a few hundred acres for a power plant would have been almost a non-issue. 

With its ground presence, convincing coal-bearing states for water etc. was no big task either. And, with huge profits and negligible debt, the balance sheet was always ready to be leveraged. 

Between 2010 and 2014, CIL planned at least three large power plants in Jharkhand and Odisha. A joint venture agreement was also ready with NTPC. 

As of 2014, almost everything was tied up for the Odisha facility. As of 2023, the project is still on the drawing board. 

Timing is crucial for the success of expansion strategies. CIL missed the thermal power capacity expansion rush during the UPA era. By the time it was ready, there was a supply glut in the thermal sector. 

With the government now pushing for fresh capacity expansion and the electricity transmission network expanded manifold, CIL has renewed opportunities in thermal generation. Hopefully, they will go for it on a priority basis. 

Pushed to expand

Looking back, there was at least one structural reason behind the apparent failure to diversify in the past. Until a decade ago, roughly one-third of CIL’s net profits were attributed to interest income from nearly $10 billion bank deposits. 

The huge cash pile attracted the attention of the promoters and CIL was forced to shell out extra-fat dividends to mitigate the fiscal gap. On the brighter side, the Narendra Modi government forced them to invest, even if in unrelated areas. 

Expansion to solar was logical from the perspective of carbon neutrality and improving the corporate image. CIL has already lined up investments in 400MW of solar capacity. A similar logic is however absent in its exposure to fertiliser manufacturing.  

CIL is a joint venture partner in Hindustan Urvarak & Rasayan Limited (HURL) and, Talcher Fertilizers Limited (TFL) entrusted to revive four closed fertiliser plants in eastern India. 

The coal-gas-based TFL facility is expected to come into production in 2024. HURL revived closed naphtha-based fertiliser plants in Gorakhpur, Sindri and Barauni and changed the feedstock configuration to natural gas. What CIL is doing here is anybody’s guess. 

The government has done well by using the company as a venture fund in expanding the country’s fertiliser production capacity. It would do better by giving the company an early opportunity to exit by selling the stake. 

Be realistic

CIL did well on the coal production front over the last three years. At a time when the global energy sector was gripped by unprecedented uncertainty and supply gaps; CIL ramped up production in quick notice, sustained the tempo and achieved distinctly high targets. 

This was uncommon in the history of the state-owned, virtual monopoly, which meets nearly 80 percent of domestic supply. CIL should now make achieving production targets a habit and tap low-hanging fruits for expansion. 

Generating thermal power is surely an easy option. The coal ministry is also encouraging mining subsidiaries to explore this opportunity. Expanding into mining verticals is also logical. 

However, getting into aluminum production or the fast-changing technology areas of solar wafer manufacturing is surely a bit too much for a miner that operated under state protection from inception. Developing the bandwidth of open market operations doesn’t come easy.