A handout to the master

Written by Indronil Roychowdhury | Updated: Jan 29 2014, 08:22am hrs
Finally Coal India Ltd (CIL) came forward to pay the government a hefty interim dividend, which mitigated the governments prolonged failure to generate resources from its PSU holdings. The government was missing out on its disinvestment targets, and by no means could it get the trade unions on board for a 5% stake sale in the company. But the interim dividend fetched the government more than what it could have generated from the stake sale.

CIL announced an interim dividend of R29 per share, which translated into a R18,317-crore pay-out. With the government holding 90%, a sum of R16,485.71 crore went straightaway to the government. On top of this, the government got another R3,113.05 core as dividend distribution tax, which together fetched it R19,598.76 crore, nearly double than what it could have earned from the aborted stake sale.

CIL was sitting on a huge cash pile of R62,000 crore but as CIL chairman and managing director S. Narsing Rao told FE earlier (July 4, 2012) there were no good opportunities for investment. The government at one time asked CIL to use its cash to pick up stakes in other PSUs, but the board didnt allow that. Returns on bank deposits were relatively simply more and safe, Rao said.

Had CIL not given the interim dividend it could have ended FY14 with a cash reserve of above R80,000 crore, 43% of its market capitalisation. Even after accounting for the outflow, which was 29% of its consolidated cash reserves as on March FY 13, CIL is in a comfortable position. There is no question of the outgo hampering our long-term capex plan as our capital requirement for mining expansion is not huge, Rao said.

In FY13, the company generated a consolidated cash profit of R19,169 crore against R16,757 crore in FY12. According to CILs internal estimates, if everything remains on track, the net surpluses in FY14 and 15 would be able to offset the outgo from the dividend payout. The company expects to regain a cash reserve of R60,000 crore by the end of FY 15. CIL has been investing between R1,200 and R1,500 crore annually towards capex and this has been funded from its cash flows. Even if the annual capex goes up to R5,000-6,000 crore, as has been pegged for FY14, CILs revenue would be enough to meet that, officials said.

CIL has recently got an opportunity to enhance its expansion programme, with the ministry of environment and forests relaxing the rules by allowing up to 50% expansion in existing coal projects. It has also got clearance for 23 projects stuck for long, and this could call for additional capital requirement. But the proportion of revenue generated from higher production would be more than the capital requirement, and the operating profit margin, at around 25% at present, could go even higher at the present level of production cost.

Even after the dividend payout, the companys return on equity and capital employed will improve. The dividend payout has sent a very positive wave about the companys present cash position and future cash flows. CILs special dividend, highest so far, has been 290% of its face value, far exceeding the dividend paid last fiscal at 97% of the face value. In February 2013 CIL paid a special dividend of R9.70 per share, which translated to a payout of above R5,500 crore.

This year, the special dividend was more than three times its paid up capital, which stands at R5,684.724 crore.