20% rise in annual royalty outgo may lead to higher power tariffs

The government’s latest decision to switch from the existing hybrid formula for royalty calculation on coal would dent the financials of state-owned miner Coal India Ltd (CIL). The company’s annual royalty outgo, currently at Rs 4,799 crore, would go up by around 20 per cent once the decision comes into effect.

This comes at a time when the Maharatna miner is already battling a severe crisis in production and dispatch. Its shareholders are up in arms over a recent rollback in prices and a presidential directive forced the company to supply fuel to power companies at a higher commitment level against its wishes.

“The latest revision in royalty rate would create an extra royalty outgo of at least Rs 890 crore for us. At the back of the recent 25 per cent wage hike already announced and no hike in prices, the increased royalty will hit us. But, we will pass on the hit to power companies,” a senior CIL executive told Business Standard.

The power companies would further pass on the additional financial burden to consumers, leading to a marginal rise in power tariffs. Coal India had announced an average 25 per cent hike in wages for its 384,000-strong workforce effective June last year. That would translate into an additional outgo of Rs 6,000 crore annually.

While a wage increase is generally followed by a price hike, the company’s attempts to increase notified prices were scuttled by protests from power companies in February. That had led CIL’s largest minority shareholder, The Children’s Investment Fund (TCI), a London-based hedge fund, to accuse the company’s board of buckling under pressure from the government and ignoring shareholder interest.

Currently, royalty on coal is charged by the government from miners using a formula that has a fixed component (Rs 180 per tonne) and a variable ad valorem component (five per cent of sale price at pit mouth). Both put together lead to a 13 per cent rate effectively. This has now been increased to 14 per cent. “Major coal producing states will now earn revenue of about Rs 6,980 crore in place of Rs 5,950 crore being earned at the existing rates, resulting in an increased combined earning by more than Rs 1,050 crore (or 17 per cent),” a statement issued by the government after yesterday’s decision read. The states that stand to benefit from the move include Jharkhand, Andhra Pradesh, Madhya Pradesh, Uttar Pradesh, Tamil Nadu, Odisha, Nagaland, Meghalaya, Maharashtra, Chhattisgarh, Assam and Arunachal Pradesh.

Experts hailed the government’s move to introduce ad valorem royalty rates for coal while agreeing it came at a bad time for CIL. “This will certainly affect the financials of CIL. But, the company’s financials cannot be the main reason why the government formulates a certain policy,” said Amrit Pandurangi, senior director at accounting and consultancy firm Deloitte Touche Tohmatsu India Ltd.

CIL’s production remained flat at 431 million tonnes (MT) in 2010-11. During the current financial year, production increased marginally to 436 MT. The company posted a 12.9 per cent jump in net profit in 2010-11, at Rs 10,867 crore, on the back of total income of Rs 50,233 crore. The company’s share price on the Bombay Stock Exchange (BSE) closed at Rs 337.7 yesterday, up 1.5 per cent compared to the previous close.

Source: Business Standard

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