)
Cash-rich Coal India Ltd (CIL) has decided to pay a hefty interim dividend of Rs 29 a share, equivalent to Rs 18,317 crore. If CIL it did not do this, it would have ended the financial year with cash of Rs 82,000 crore, 44 per cent of its market capitalisation.
While this was also due to the money-short central government’s pushing, given CIL’s huge cash balance and no major capital expenditure plan in the short term, the Street believes rewarding shareholders is a good strategy. While some analysts have marginally lowered their earnings per share estimates for CIL, led by lower other income (due to fall in the cash balance), they remain positive on the stock.
Due to the lack of major capex in the past and the business model (which does not require huge capex for growth), CIL has been able to accumulate cash. After accounting for this outflow and annual cash generation, analysts estimate CIL to still have cash of Rs 60,000 crore by end-March 2015.
Coal India has been investing Rs 1,200-1,500 crore annually towards capex, which is pegged at Rs 5,000 crore for FY14. Even if the capex stays at higher levels (as is expected), the impact on CIL’s financials is unlikely to be significant. Analysts estimate capex requirement at Rs 5,000-6,000 crore annually, which they say can be funded from future cash flow.
The Union environment ministry recently relaxed the rules, allowing about 50 per cent expansion in existing coal projects; it also cleared 23 CIL projects stuck for want of clearance. This is a significantly positive development for CIL and should boost its production. Higher production would mean stronger profit growth, as CIL’s operating profit margin is 24-25 per cent. Also, after the dividend payout, its return ratios (return on equity and capital employed) will improve, which should lead to better stock valuations.
