Coal India's bank interest income likely to fall after another buyback

Coal India Ltd’s or CIL’s consolidated income from bank interest and other investment sources is likely to fall further this year following the Maharatna’s proposal to buy back shares worth Rs 1,050 crore.

On a consolidated basis, the coal miner usually earns more than Rs 4,600 crore every year as interest from various banks, dividend from mutual funds, rental income as well as profit from sale of assets, among others. 

Writeback of provisions and liabilities made in the earlier years that are no longer required are also considered other income.

During 2017-18, a year after Coal India parted with Rs 3,650 crore (its first buyback of shares was in 2016-17), its income from other sources declined by 12.51 per cent from Rs 5,324.21 crore to Rs 4,658.32 crore mainly owing to lower earnings from interest on bank deposit.

During the period, interest earning on bank deposits declined by Rs 725.20 crore from Rs 2,767.30 crore in 2016-17 to Rs 2,042.10 crore in 2017-18. 

“The decline has been taking place primarily owing to reduction in average investment in bank deposits which is affecting the average yield from banks. Last fiscal year, the yield from mutual funds was also affected,” an official said.

Besides, the company board, while deciding on the forthcoming buyback of shares this year, had also raised a similar concern.

In a regulatory filing, Coal India said, “We believe that the buyback is not likely to cause any impact on the profitability or earnings of the company, except to the extent of reduction in the amount available for investment, which the company could have otherwise deployed towards generating investment income.”

The filing added that in case Coal India is able to fulfil its target of buying back 6.46 per cent of its total shares on a consolidated basis, it will result in an outflow of Rs 1,050 crore. This will impact the investment income earned by the company.

As on March 31, 2018, Coal India had free reserves of Rs 10,049.75 crore and it is now fast-tracking a Rs 7,000 crore investment drive to procure various types and sizes of high capacity heavy earth moving machinery, which is expected to boost production.

Coal India is funding the forthcoming buyback by raising money from its subsidiaries. Its free reserves are also spread across its subsidiary companies.

A senior company official said that mine mechanisation is a major objective for the company to boost production under a situation when some of its key subsidiaries like Mahanadi Coalfields, South-Eastern Coalfields and others are registering a production shortfall over high demand for fossil fuel. 

The official added that surplus funds help the company take “big decisions with confidence.”

The investment on heavy machinery and the proposed buyback will all be funded from internal accruals.

Besides, according to the official, the company’s ability to provide hefty dividends may also get reduced in the coming years.

Analysts, on the other hand, said that while this buyback would return surplus funds to its shareholders with the government being the largest beneficiary, it will also help in improving return on equity. 

This will see a reduction in the equity base and other financial ratios, thereby leading to long term increase in shareholder value.

A second company official also said that this buyback offer provides the shareholders an option to either participate in the buyback and receive cash in lieu of equity shares or not participate and enjoy a resultant increase in their shareholding percentage. The buyback will result in changes in the shareholding pattern of the company although the government will continue to be the largest shareholder.

During 2011-12, Coal India registered a huge jump of 70.38 per cent in its other income at Rs 6,093.38 crore from Rs 3,576.43 crore which it earned in 2010-11. While this income went up to Rs 7,198.16 crore in 2013-14, its interest income from banks started to fall from 2014-15 when it hovered around Rs 6,570.64 crore. It dipped further to Rs 5,728.45 during 2015-16 and again fell to Rs 4,658.32 crore in the last fiscal year.