Golden eggs in advance: Coal India share sale should go smoothly, with little help from LIC

The Modi government plans to offload a 10 percent stake in Coal India today (30 January), raising a potential Rs 22,000-24,000 crore in one go. This will be nearly half the total money of Rs 43,425 crore the budget had pencilled in for raising through public sector share sales. The Coal India sale involves a 5 percent dilution, to be raised to 10 percent if there is demand. At Thursday’s 12 noon price of around Rs 370, down 3.7 percent in the wake of the disinvestment announcement, it is more likely that the government will achieve the lower end of the expected collection. The higher end will depend on whether the usual LIC crutch is used to bail out the disinvestment. 2015 is not a good year to sell energy stocks, whether Coal India or ONGC, but given weak tax revenue growth, the fiscal deficit target of 4.1 percent in 2014-15 is unachievable without selling the household silver at rock-bottom prices. Global thermal coal prices have been in a free fall since the Lehman crisis, and have dropped a further 50 percent in the last few months. However, Indian coal is still much cheaper than imported coal, and the only issue is inadequate production by Coal India, which necessitates nearly 200 million tonnes of coal. [caption id=“attachment_2033651” align=“alignleft” width=“380”]  Reuters[/caption] So, despite falling global prices, the immediate profitability of Coal India is not really threatened, which means that the current share price of Rs 370-and-odd is probably more than reasonable for investors to take the risk. This price is artificially low due to the government’s high sensitivity to coal prices, when thermal coal is the mainstay of India’s power production. Prices may also be raised shortly. At some point, if the government allows Coal India to price its coal closer to market prices, its profitability will zoom. So, even LIC will not lose out by investing in Coal India right now. Moreover, if, in its search for higher revenues from Coal India, the government also asks it to pay higher dividends (P Chidambaram did this last year), the short-term outlook for the stock price will also be good. Coal India’s disinvestment programme has no reason to fail this time, given buoyant market conditions right now. The government should be able to sell at least 5 percent without effort; the balance 5 percent may need some pushing and prodding from the finance ministry. Ideally, shares in resource companies like Coal India and ONGC should not be sold without policy clarity on pricing, future competition, and level of subsidy burden sharing. But then, Arun Jaitley is in a hurry to collect his golden eggs in advance for meeting this year’s fiscal deficit. He can afford to take a risk with Coal India, where the government holding is nearly 90 percent, which will still leave him with another 30 percent to play around with in the coming years. But in the case of ONGC, where the government plans to sell 5 percent by March, the leeway is lower. Government holding in ONGC is just under 69 percent. At least in ONGC’s case, Jaitley should either announce the subsidy-sharing policy (he should, in fact, end it altogether) or offer a roadmap for its eventual termination in order to realise better prices from the market now or in the future.