Coal can be gold

Hopefully the coal IPO will fuel more divestment

Nothing energises the Indian capital market the way a mega public sector issue does. Normally, from day to day, the Indian stock market moves up and down on foreign cues. But it is the prospects of participating in a bit of the government’s sale of family silver that really take the shareholding community and habit forward. In this sense, the Coal India IPO could have hardly come at a more important moment. A question mark hangs over the future of the current stock market rally because the lay investor is significantly missing, unlike during other such rallies. Hence the need to liven things up, create a buzz and a hype that can make the idea of owning shares attractive. Independent analysts’ evaluation indicates that the government is not repeating the mistake made with earlier public sector IPOs and at the price band declared will leave something on the table for investors. This should ensure the success of the issue which, in turn, will enable the foreign institutional investors who have been coming in in a big way to stick to their cycle of booking some gains while increasing their secular commitment to one of the most attractive emerging markets. Thus, if all goes well, through the Coal India IPO, India will join the line of successful mega issues from national companies of emerging economies.

The longer-term prospects also look bright for the most part. There is a huge energy shortage in the economy and a trend growth rate of 8 per cent plus will, if anything, make the country’s energy balance even tighter. Against this, India in general and Coal India in particular have enormous mining reserves which will last over a hundred years. Since Coal India is already sitting on a major cash pile, there should be no problem in taking a quantum leap in raising output to meet the near-insatiable demand, creating wealth for all stakeholders. Three things can dampen this rosy scenario — internal efficiencies, the environmental issue and price realisation. The company was at one time burdened with a huge workforce which has been whittled down over time. This has, with increasing resort to open cast mining, improved efficiencies that can be bettered with greater use of technology.

On the important environmental issue, Coal India will need to and likely be given alternative reserves in lieu of those that fall in no-go forest areas. There is also the need for the economy to move to clean coal technologies which will be imperative to rein in carbon emissions and global warming. The Coal India chairman has already indicated plans of extensive investment in coal-washing facilities which will not only reduce emissions but also the cost of transportation. But the biggest question mark hanging over Coal India’s ability to maximise margins and reward shareholders in the future is the government’s willingness to allow it to charge global prices. The elaborate pricing formula under which the company operates allows it to do much less, thereby both raising prospects of higher future returns and regulatory uncertainty. If coal prices are determined anything near to the way oil prices are fixed now, the future will be downbeat. The government not only needs to give assurances in this regard, but also stick to them.