Top Coal Miner Averts Strike With Bonus Pledge: Corporate India

Coal India Ltd., the world’s largest producer of the fuel, averted a strike by its executives after assuring them of bonus payouts that may cost the state-owned company as much as $152 million.

Demands for bonus payments due for the past six years will be met by Oct. 31, R. Mohan Das, director of personnel at the Kolkata-based firm, said in an interview. The top managers, who have threatened to stop work indefinitely and wore black armbands for a day last month, said they will review their strategy should the company renege on its promise.

Frequent worker unrests at the nation’s second-biggest employer with 358,000 people have hampered production at a time when Prime Minister Manmohan Singh is trying to boost power generation needed to revive economic growth from the slowest pace in a decade. A day’s strike may cost about 1.3 million metric tons in coal output and almost 2 billion rupees ($32 million) in revenue for the company that had cash reserves worth $10 billion as of March 31.

“I am very hopeful the matter will be resolved soon,” Das said from his office. “We can’t obviously meet all their demands, but whatever is reasonable will be done.”

Under Pressure

Coal India, which is 90 percent owned by the state and fires about half of the nation’s electricity generation capacity, is under pressure to ensure uninterrupted shipments of the fuel. Blackouts shave about 1.2 percentage points off the growth of the $1.8 trillion economy, which is Asia’s third-biggest, according to government estimates.

Rising labor costs may hurt the company that is already struggling amid a drop in demand from customers including cement, steel and sponge-iron factories after industrial production rose an average 0.9 percent starting 2012, the least since 2009.

The company reported its first annual decline in profit in five quarters for the three months ended June 30 after electronic auction prices dropped 16.4 percent because of lower demand. Operating margin for the period narrowed to 21.14 percent from 25.93 percent a year earlier.

Government rules prohibit performance-linked bonuses to employees of a loss-making company. Some of Coal India’s executives, who also work for its unprofitable units, were thus ineligible to receive the payments. To treat all the officers at par, the parent company’s board withheld bonuses from all of them until the issue is resolved.

Worker Reality

“Higher employee payments and material prices are threatening Coal India’s profitability,” said Giriraj Daga, an analyst at Mumbai-based Nirmal Bang Equities Pvt. “Between keeping workers happy and maintaining profit margins, the workers will have their way. That’s a reality the company and the shareholders will have to live with.”

Daga, who has a buy rating on Coal India, said he is turning negative on the stock and may downgrade it soon.

The shares of the company rose 3 percent to 303.85 rupees at the close in Mumbai, pruning this year’s loss to 14 percent. The benchmark S&P BSE Sensex index gained 2.4 percent in 2013.

India had a peak electricity deficit of 6.3 percent in the five months to Aug. 31, according to the Central Electricity Authority, a unit of the federal power ministry. Power generators, including Reliance Power Ltd., NTPC Ltd. and Adani Power Ltd., have together shelved projects with more than 50,000 megawatts of generation capacity, citing fuel shortages. Trucks waiting in long queues at mines to carry coal to railway sidings and a congested rail network exacerbate the shortfall in output.

Diverting Sales

With Singh’s push for electricity generation, Coal India will be diverting sales to its lowest-paying utility customers after signing fuel-supply accords with power plants with 78,000 megawatts of capacity. As a result, the company may risk losing its non-utility customers, comprising 10 percent of its output, who had offered as much as 80 percent premium for the fuel at e-auctions.

“Coal India will have to shift sales from its most profitable channels to meet its fuel supply obligations with power plants,” said Rahul Jain, a Mumbai-based analyst with CIMB Securities India Pvt., who has an “underperform” rating on the stock. “A decline in earnings is inevitable.”

The company’s output of 167.32 million tons in the five months to Aug. 31, a 2.7 percent increase over a year ago, still fell short of a targeted 173.04 million tons, according to a stock exchange filing.

High Morale

To meet its production goals, the miner must keep the employees’ morale high, said P.K. Singh, secretary general at the Coal Mines Officers’ Association of India. Coal India has 17,600 executives, less than a permitted strength of 19,000. Many of these executives work in difficult conditions, facing threats of kidnapping and murder by Maoist rebels in states where many of the company’s coal mines are located, and deserve adequate compensation, Singh said.

The company’s non-executive workers won a pay increase for five years starting July 2011 after threatening to go on a strike. They stopped work for a day in 2011 to get a higher festival bonus.

Besides increasing employee expenses, lack of rail connectivity and erratic availability of railway rakes have also posed a challenge for the company, said Abhisar Jain, an analyst at Mumbai-based Centrum Broking Pvt. The company is investing more than $1 billion in building new lines that could help add 300 million tons in annual output, Chairman S. Narsing Rao said in February.

“There is no question that Coal India has to keep its employees motivated to get the best out of them, but it has to ensure employee costs don’t go out of hand,” Jain said. “Investments in improving logistics and acquiring better technology should remain key priorities for increasing output.”

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