Coal India to hive off its coking coal subsidiary
With the divestment program going slower than expected (take the recent cases of LIC and BPCL), the central government has been urging CPSEs to monetize part of their holdings in subsidiary companies. One of the latest to plan such a monetization is Coal India Ltd.
It will hive off a 25% stake in its coking coal subsidiary, Bharat Coking Coal Ltd (BCCL). It will also eventually look at listing BCCL in the bourses as a full-fledged listed company.
Apart from BCCL, Coal India also plans to divest a stake in another of its subsidiary viz. Central Mine Planning & Design Institute (CMPDI). This is a research and consultancy arm of Coal India and runs specialized projects to enhance mine productivity.
However, the timelines for these two monetization plans is not too clear as it needs the approval of the respective boards, the Coal Ministry as well as approval from the government.
One of the ideas in this process is to monetize its subsidiary interests and become resource generating. The other idea is to ensure that capital allocation is more focussed for the parent company.
Towards this end, Coal India Ltd plans to appoint merchant bankers shortly who will then invite expression of interest for the stake sales. Of course, this is still subject to a nod from the Coal Ministry and the government. Listing will be at a later date.
Among the two companies proposed to be divested, BCCL is loss making while CMPDI is profit making. For FY21, BCCL posted a net loss of Rs1,209 crore against a net profit of Rs919 crore in FY20. For FY21, BCCL could only achieve production of 24.66 MT against the target of 37.13 MT.
Even actually offtake was much lower than anticipated. This caused the sales revenues of BCCL to fall from Rs8,968 crore in FY20 to Rs.6,150 crore in FY21.
However, CMPDI is an extremely profitable venture and also low on capital outlays being a purely service oriented business. This model is also low on capital burn and high on ROI.
For FY21, CMPDI reported top line sales revenues of Rs.1,489 crore and bottom line net profit up 64% at Rs.317 crore. This translates into net profit margins of 21.3%, an extremely attractive level and should also find many interested buyers.
More than anything else, this move will provide a major boost to the government’s efforts to unlock capital. For many PSUs, the capital is locked up or stuck in sub-optimally employed state assets. This process of monetizing subsidiaries will allow for better allocation of capital and put it to more productive use.
Prior to the latest decision, CPSEs had freedom to create subsidiaries and joint ventures, but lacked the requisite powers to sell or exit them.
One line of thinking in the government is also that Coal India should fully exit all its subsidiaries and list them as separate entities. This would leave Coal India more as a holding company. This can boost coal output in sync with rising power demand.
Some of its key subsidiaries include Eastern Coalfields, Central Coalfields, Western Coalfields, South Eastern Coalfields, Northern Coalfields, Mahanadi Coalfields and North Eastern Coalfields.
BCCL is engaged in extraction of coking and non-coking coal which is a very important input for steel plants, aluminium plants, power companies, fertiliser plants, cement and other sectors. Coking coal has been a scare commodity and India has been relying heavily on imports.
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