Here's what's wrong with Coal India divestment

Not only is govt selling cheap its crown jewel, but it is also affecting CIL's prospect to raise money when it is needed

When it comes to investing, it is when you sell that matters more than when you buy. Holding on to your winners for as long as you can and cutting your losses as soon as you can have been the mantra of successful traders. But many retail investors do the exact opposite in holding on to their losses and selling their winners too early.

In its divestment programme, the government also seems to be acting like a retail investor. Reports say the government has issued a Request for Proposal (RFP) to engage merchant bankers to divest its stake in Coal India through an offer for sales (OFS) route.

Coal India is among the better performing public sector enterprise. Under the Minister of State for Coal and Power, Piyush Goyal, the company has finally found a direction. In the next five years, Coal India is expected to double its output.

Coal India is one of the few coal producing companies globally that is in profit. Recently, the fourth largest coal company in the US, Alpha Natural Resources, filed for bankruptcy. Analysts expect the two largest coal companies — Peabody Energy and Arch Coal — to also file for bankruptcy. Falling coal prices forced Europe's largest coal company, Kompani Weglova, to shut down four mines to avoid bankruptcy. 

Coal India, the world’s largest coal producer, has been able to stay in black on account of ever increasing demand in the domestic market and its low cost of operation. In fact, India has to import coal because Coal India has been unable to satisfy the domestic demand. Coal India’s management, along with the coal ministry, has drawn up ambitious plan to double the company’s production, which has been largely stagnant for a number of years on account of various reasons.

In order to double its capacity, Coal India is expected to incur a capital expenditure of about $20 billion. Though the company has over Rs 50,000 crore of cash on its books, it will still need to raise money even after utilising future cash flows.

The present OFS issue would mean that the government is the only beneficiary and the company will not get any money from the new set of investors who will be buying these shares. The government had already sold 10% stake in the company on January 31, 2015 and raised Rs 22,557 crore. The centre is expecting to raise over Rs 23,000 crore from the current divestment.

With nearly Rs 50,000 crore worth of shares being coming in the market within a year, it would be difficult for the company to find new investors in the short term, post the current OFS. When the company will actually need money for its growth, it will have a tough task to raise it. Rather than waiting to encash on the growth prospect of the company, the government wants to cash out immediately leaving the company to fend for itself when it needs money.

The government is more concerned in meeting its ambitious divestment target than looking at which stocks it is selling and at what valuations. Fixing a divestment target of Rs 69,500 crore for the year, the department of divestment has set a tough target for itself. Till date, it has been able to raise only around Rs 3,000 crore.

In order to meet its divestment target, the government is selling cheap its crown jewel. In doing so, it is not only hurting itself of a higher figure in future but also affecting the company’s prospect of raising money when it is needed.

There is a market adage that says that you should sell when you can and not when would be compelled to. The government’s divestment strategy fit this line as it is compelled to sell its stake in order to boost its divestment figure.