Coal India: Govt's cash cow

Coal India is turning out to be a classic case of government milking its cash cow. Left with a few profitable public sector listed companies, government is taking away whatever it can from the biggest cash generating listed entity.

The latest in the series of such measures is the buyback announcement which will reduce Coal India’s cash by Rs 3,650 crore. The open offer is for 10.89 crore shares at a price of Rs 335 per share. Since the current price is around the buyback price there is no arbitrage opportunity to capitalise on.

But benefit to its shareholders seems to be the last thing on the mind of Coal India’s promoters – the government of India. The current price of Rs 335 is lower than the price at which government divested its stake at Rs 358 in 2015. Given the current market price, it is very likely that government would be the only shareholder willing to submit its shares.

Government currently owns 79.65 per cent equity in the company. Post the current buyback, government is expected to announce another divestment to help it reduce its holding to 75 per cent by April 2017.

By listing Coal India, government has been the only beneficiary. Coal India was first traded at a price of Rs 352 on November 8, 2010 and touched a high of Rs 447.25 but currently trades at Rs 334. Apart from the high dividends, the stock has underperformed the broader market which is near its all-time high levels. Non-performance of the stock raised problems for the government in the past during its divestment roadshows.

But more than its lacklustre performance on the bourses, the government’s use of Coal India to fund its fiscal gap has hampered the company. Coal India’s net worth (sum of equity capital and reserves) touched a value of Rs 48,471.99 crore at the end of FY13. Since then it has continuously fallen and by the end of FY16 it stood at Rs 27,581.24 crore. This is despite the fact that every year Coal India has deposited its profits in the reserves.

Cash levels in its strongest year of FY13 stood at Rs 62,236 crore, these have been depleted to Rs 38,312.77 crore by the end of FY16.  In the past four financial years, the company has shelled out Rs 57,542 crore by way of dividends only, most of it has gone to the government since they were the largest shareholders.

To some extent, Coal India is to be blamed for its non-performance both in the market and on the business front. The company has been hoarding cash with no idea on how to utilise it. Private sector players have been more aggressive, realising that Coal India is a monopoly and has not been able to increase its production to meet domestic demand they went looking for coal in other countries. Coal India’s attempt to search for coal in Africa has come to nothing.

Coal India’s acquisition in Mozambique six years ago has yielded an embarrassment. The nominal valuation of its investment has come down from Rs 4,500 crore to Rs 2 crore in its balance sheet during this period. Coal India now wants to invest in setting up super critical thermal plants and reviving fertiliser units. One cannot be blamed into thinking that perhaps dividend payout is a better use of money.