Commodities

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Dust off all the soot and grime, and Coal India really is a gem. This monopoly miner manages to garner a 23 percent return on invested capital. Not only does that put it way above any of its global peers, but almost places it in the league of Apple, which earns 28 percent. Trust the Indian government to choose the perfectly wrong time -- a global energy glut -- to decide to offload a 10 percent stake in the company. 

Apple of India's Eye
Coal India's return on invested capital is streets ahead of its global rivals
Source: Bloomberg
* Average of world's biggest coal miners with revenues in excess of $5 billion

In early August, Coal India was worth almost $44 billion. That month, the stock tumbled as much as 24 percent and now the market value is $32 billion. So desperate are the New Delhi authorities for funds, however, that they don't mind selling.

A panel of ministers on Wednesday gave a go-ahead for the sale, although the price, and offer date, will be decided later. Finance Minister Arun Jaitley would want to book the revenue before his financial year ends in March 2016. It's not clear if investors will have worked up an appetite for Coal India shares by then. Its underlying business isn't immune to the global commodities carnage -- far from it. Operating profit fell 46 percent in the September quarter, and while the company sold more coal than the year before, the price at its auctions collapsed. 

Selling Out
Source: Bloomberg

Miners will stay in the doghouse until China's economy shows signs of stabilizing. That pessimism applies to Coal India, too, with both Capital Group and Franklin Resources cutting their stakes in the three months to Sept. 30.

Well-Lined Pockets
Source: Company filings on Bloomberg

If push comes to shove, state-owned Life Insurance Corp., which already has a 6.98 percent stake in Coal India, will probably add more of the company's stock to its $63 billion equity portfolio. That's cold comfort for other minority shareholders, though. True, liquidity will improve once the government's hoard falls from almost 80 percent, and there's no risk of dilution -- a company sitting on the equivalent of $9.5 billion cash doesn't need to raise fresh equity.  Yet with the shares plunging, investors won't relish the idea of more of the company's stock leaving the public treasury.

The outlook isn't all bleak. For one thing, coal will probably remain India's fuel of choice for generating electricity for the foreseeable future. While solar power is growing rapidly and becoming cheaper, Prime Minister Narendra Modi has set an ambitious target of 100 gigawatts of solar production by 2022, and ironically even Coal India, which cops the flak whenever the nation has one of its infamous blackouts, has a bold sales target -- it's not hard to reconcile the two. Once the domestic economy starts chugging at a faster pace, India's power plants will still have enough demand for Coal India's production. What they won't do is buy coal from Australia anymore.

Besides, there's no denying the business case for eventually breaking Coal India into smaller, more efficient companies. A restructuring may even give the family jewels a brighter shine.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net