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5 reasons why Coal India divestment will be difficult

Coal India management are on a roadshow trying to help the finance ministry meet their divestment target. The quantum of shares to be sold has been cut to half after the company's union objected to a 10% stake sale which would have reduced government's stake in the company to 80% as it would tantamount to privatisation.

How a stake sale of only 5% which would bring government's stake down to 85% be different from a 10% stake has not been explained by the company's union. Perhaps a bonus issue which was announced as a compromise formula, for its employees, which would cost the company over Rs 1,000 crore did the trick for the government. Never mind the hollowness of the logic of privatisation.
 
It is this labour union, its size of 3.58 lakhs and repeated threats of strike to raise their salaries that are likely to be the sore points when the management meets investors on their roadshows.
 
Even without these issues, raising $1.6 bn will be a tough task for the company.
 
Here are five reasons why Coal India management will have a tough time selling its issue.
 
1) Share price of Coal India is around 15% higher at Rs 285 compared to Rs 245 at which the shares were offered in October 2010. Barely enough return to even cover inflation or saving rates return. In fact, it trades at a price lower than the price at which it was listed and only a month back had gone below the offer price. In dollar terms (taking into account the depreciation of the rupee vis-a-vis the dollar), Coal India is trading at a 16% discount to the price at which the FIIs were allotted shares. This stock performance of the company will be at the back of the mind of investors before they finally take the plunge.
 
2) The most important question that will be asked by the investors is about the management's ability to call the shots. It is an open secret that the company has no control on the price at which it can sell its coal. Government decides the price at which coal can be sold to its main customer, which happens to be the largest power producer in the country, NTPC, a public sector company. Raising coal prices would mean that NTPC will have to raise power tariff for its consumers. A politically sensitive move especially in an election year. In other words, the company will not have any say on the final price of its products.
 
3) In order to meet the shortfall in coal supply, Coal India is diverting coal to its lowest price consumer, NTPC rather than selling in the auctions which yields a better price. This indicates that the management of the company does not even have control over the market that can give them a better price.
 
4) Coal India has not been investing for the future, as a result its cash pile is mounting. Interest on this cash pile now accounts for nearly one-fourth of its operating profit as against 17% at the time the company first approached the market. Quality of earning is thus deteriorating.
 
5) Quantity of coal produced by the company has stagnated over the last four years. From 439.8 million tonnes produced in March 2010, the company has sold 443.38 million tonnes in March 2013. It is only the small changes in prices which was necessitated due to rise in labour cost that has resulted in its turnover increasing by 60% during this time and net profit increasing by 80% during this period.
 
This issue is an offer for sale (divestment), which means the company will not be getting any money from the issue but only the government will. Now Coal India is a relatively liquid stock, which would then raise the question of why should an investor buy the shares through the offer which will be made shortly rather than buying it from the open market.
 
The only reason they would do so is if the discount to the current market price is better than the other divestment issues which have recently taken place.

Recent divestments have taken place at a discount of nearly 5%. If Coal India gives a bigger discount, it would be close to the price at which it first issued its share, something that the present shareholders will not appreciate nor would the market.

Source: Business Standard