Are Coal India's bankers making more money than its investors?

It seems neither Coal India (CIL) nor its shareholders know what to do with the huge cash pile of Rs 62,000 crore the company is sitting on. A back-of-the-envelope calculation of extrapolating the cash flows in the previous financial years, this kitty is likely to swell to Rs 82,000 crore in FY15, or nearly 44% of its current market capitalisation (m-cap).

If things remain as they are, at some point in time, the market will start putting more value for the cash CIL holds in its books rather than its business of coal mining!

One argument suggest that the company should deploy the funds more productively by investing in assets that would yield high returns or return it to the investors through the buyback / special dividend route. Simply keeping money in a bank deposit would not yield a high return for CIL since the average yield on such bank deposits may not be more than 8–9%.

On the other hand, those investors who do not wish to tender the shares in a buyback could still play the stock for dividend.

Capex vs Buyback

Another sensible step for the company could be to start deploying cash in the business through capex that will not only help in growth but will also help boost valuations once earnings improve. Even from the shareholders perspective, if the company deploys money in the business, every rupee of earnings will add 12 times (based on price to earnings ratio of 12) to its m-cap.

In this case, investors will make more money if the cash is deployed in the business as stock price could increase on account of an overall improvement in the return / financial ratios.

Another way the company can utilise the cash is to go in for a buyback. At current market price, the company is making almost 10% earnings yield, which is better than the bank rate. However, a buyback may not be a feasible option considering that it will lead to the liquidity issues and price manipulation in the event of a low float.