Owing to hefty dividend payout in the past three financial years, backed by frozen coal prices, Coal India faced a 30 per cent decline in its net worth between 2012 and 2016. During the tenure of the United Progressive Alliance (UPA-2) government, the company had paid Rs 38,150 crore as dividend. In FY16, the payout was Rs 30,381 crore.
While the shareholders have been the largest beneficiaries, Coal India is steadily losing its sheen as a cash-rich company whose net worth peaked to Rs 48,461 crore during 2012-13.
While the company’s net worth started falling during 2013-14, the process surged after the National Democratic Alliance government came to power in 2014.
During the first four years of UPA-2 (2009-2013), Coal India paid only Rs 19,833 crore dividend, which shot up to Rs 18,317 crore during 2013-14.
While Coal India earned a total income of Rs 80,691 crore during 2014-15, it paid a dividend of Rs 13,075 crore while making a net profit of Rs 13,727 crore. Although it was left with Rs 652 crore after the payment, corporate dividend tax and transfers to general reserves accounted for another Rs 5,003 crore, which resulted in a retained deficit of Rs 4,761 crore for the year.
In the same financial year, the company’s net worth declined by five per cent to Rs 40,343 crore against the previous year’s net worth of Rs 42,392 crore.
“The primary reason why the company’s net worth has been declining is because it is paying a large amount of dividend, which is eroding its cash reserves,” said a former Coal India official.
In 2015-16, although making a net profit of Rs 14,274 crore, Coal India decided to pay Rs 17,307 crore as dividend, which resulted in the company posting a retained deficit of Rs 8,103 crore.
In the last financial year, the company’s cumulative profit in the balance sheet shrunk to Rs 2,651 crore from Rs 10,754 crore in 2014-15, making the company poorer.
In the past three financial years, against a net profit of Rs 43,113 crore, the Maharatna company paid a dividend of Rs 48,699 crore. Around 70 per cent of the same had gone to the government coffers as it is the largest shareholder in the company.
Under the UPA rule, owing to the same reason of higher dividend payout, the company’s net worth had shrunk 12.5 per cent to Rs 42,392 crore in 2013-14 against Rs 48,461 crore in the previous financial year.
“The falling net worth is not just because of a higher dividend payout. Coal prices did not rise until recently, which had affected the company’s income as well,” said an analyst.
After a gap of three years, in May this year, Coal India increased the fossil fuel’s prices by 6.29 per cent.
Even though the company’s net worth is on a decline, the cash-rich company might not find it difficult to perform well in the stock market or sustain its development plans.
“Shareholders actually like a company to liquidate their extra reserves by means of dividend. This boosts confidence,” said an analyst with Motilal Oswal.
According to the analyst, when a company reduces its net worth, the return on equity, which is the net income returned as a percentage of shareholders’ equity, improves, instilling shareholders’ confidence in the company. “Although the company’s net worth is falling, the company’s cash flow is strong which will make up for the depleting reserves,” the analyst added. Typically, Coal India is spending Rs 10,000-12,000 crore each year as capital expenditure, while its reserves are four times that. For 2016-17, the coal miner has allocated Rs 12,836 crore as capex. Global mining companies, which had returned significant cash to shareholders in recent years, cut down the same last year as cash dried up. In contrast, Indian public sector mining majors were able to return higher dividends, taking the benefit of greater market opportunity.
“It’s normal for a resources company with low debt and investment plans that are well funded to return remaining cash to shareholders. This positions them favourably when commodity cycle improves and they need to raise funding from the market,” said partner at PwC India, Kameswara Rao.