Coal India is bleeding but govt keeps pressuring to declare large dividends

Coal India Limited (CIL) is bleeding its cash reserves. As the first ever auctions for coal mines without any restrictions on sale of coal began on November 2, it is a sobering thought. The haemorrhaging also has implications for whether CIL will end up practically defunct like another public sector behemoth, BHEL, or whether it would manage to retain its dominance, like Life Insurance Corporation. Perhaps the government feels the former is more likely and so is in a hurry to gobble up dividends and sell more tranches of its shares.

Since September 2018, CIL’s cash reserves have fallen over 17 per cent to Rs 28,446.83 crore. Although the Covid-19 pandemic has hurt coal movement, it is not the primary reason for CIL’s ill health. As of March this year, the company’s cash flow from its operations had dried up by three-fourths.

What is hurting the company is its old nemesis, first highlighted by the World Bank in the mid-nineties: Declining efficiency. BSE data shows CIL’s operating profit margin (operating profit to sales ratio) for the June quarter at 16.51 per cent, the lowest in five quarters. It was 26.51 per cent in June 2019. A third of its income from operations disappears in its staff cost. No surprise, CIL has the costliest output per man shift among major mining companies globally.

CIL’s efficiency is slipping despite operating in a protected market (so far) with a straightforward line of business. CIL has to just dig for coal and dump those besides the rail lines running past the mines. India, faced with a perennial shortage of coal, has enough buyers ready to arrange the transportation and pay for the entire cost.

This operation is simple in theory but proves massively difficult in practice, because the company routinely supplies coal of inferior quality than the buyers have contracted for, which raises the cost for companies because they often have to import better quality coal.

When the company was listed in 2010, this problem of efficiency was expected to be sorted out. Evidently it hasn’t. Meanwhile, CIL has effected two successive revisions within the past five years in the price of coal it mines to bolster profits. As a result, a tonne of coal from Mahanadi Coalfields, the most efficient of CIL’s seven subidiaries, costs Rs 4,365 per when it reaches a power station in Tamil Nadu against the imported coal price of Rs 3,779. Ironically, despite having the world’s fifth largest coal reserves, India’s coal imports have risen by a CAGR of nearly 10 per cent in the five years up to 2019-20, the third largest by value among imports.

In response, major coal customers such as public sector NTPC have created a backward linkage to develop their own coal mines. In the recent auctions, key power, aluminium and steel producers, such as Adani, Hindalco, Vedanta and JSW, have bid for mines that will substantially end their dependence on CIL.  

In a decade since November 2010, when it reached Rs 342.35 on listing, CIL has erased almost 67 per cent of its price to reach Rs 114.2 as of October 30. In a year of stellar upward movement in the market, the CIL stock has underperformed the BSE Sensex by 43.5 per cent. No wonder brokerages have no buy recommendations on the stock. It is the reason CIL will possibly not opt for a share buyback “owing to its financially weak position,” a Business Standard  report notes.

The government, too, does not seem to have a strong plan to reverse this decline. Instead, it is milking the stock dry for its cash reserves. The government owns 66.13 per cent and this has paid handsome returns. In the past three years, the company’s average dividend yield is at 10.9 per cent — compare this with a minus 60.47 per cent return on its stock price. In other words, the stock is in value more for the dividend it pays than for its performance in the market.

In March this year, CIL paid a 120 per cent dividend on each share. Even that is less than the 165 per cent it paid out in 2018. The government’s attitude makes worse the already adverse international environment against coal. The result is foreign institutional investors (FIIs) are selling the stock. As of September 20, the number of FIIs holding the stock fell by 13 per cent.  This is quite a climb-down for a stock that had listed on a massive premium a decade ago. It had made CIL India’s fourth largest company by market cap.

The other path the government has used to benefit from CIL is share sales. In 2010, the sale of a 10 per cent stake in CIL had garnered Rs 15,200 crore for the government. In this financial year, there are plans to sell another 15 per cent. Given the low share price, the government will possibly get much less — certainly nowhere near the Rs 12,000 crore predicted by some media reports. Still, it is the dividend that is keeping the markets interested and erasing its cash reserves.

 Yet this approach is strange. India needs more coal for at least another couple of decades, even with the target of producing 450 Mw from renewable energy. The balancing power for renewables has to be either gas or coal. Given that coal is available domestically. there is good reason to keep CIL in shape. As Rahul Tongia in his Future of Coal points out, there is an even greater reason. “CIL’s average coal tonne [or rate of extraction] has been declining perhaps by about as much as 1 per cent per annum over multiple years.” This means that India needs more production just to keep the same number of downstream plants running.

This shortfall cannot be made up by the auctions taking place now, even if those coal mines come up within the next few years. Copious quantities of coal will continue to be shipped to India from as far afield as Richards Bay in South Africa. But the shortage could get worse if CIL totters.