Coal India developments unlikely to impact PSU divestment: Angel Broking

As Coal India Ltd prepares to sign fuel supply agreements (FSAs) with power generation companies following the Presidential directive, the question uppermost in the minds of the investors is: How the Government's handling of the episode would impact investor sentiments, particularly of FIIs, towards public sector undertakings (PSUs)?

In an interview to Business Line , Mr Dinesh Thakkar, Chairman and Managing Director, Angel Broking, Mumbai, shares his views on the controversy and its impact on the markets.

Excerpts from the interview:

What is your view on the course adopted by the Government in the Coal India issue?

Given that Coal India had signed Letters of Assurance (LoA) with power companies, the Government is now mandating Coal India to sign fuel supply agreements (FSAs) as power companies have made huge investments based on those LoAs.

However, Coal India is currently struggling to raise production, and there is likely to be a shortfall in meeting the FSA requirements via domestic production.

The likely path for Coal India to meet the new FSA requirements could be a combination of (a) reducing e-auctions, (b) speeding up clearance processes, and (c) import the shortfall in coal.

Considering the current gap between imported coal prices and corresponding linkage prices for similar grade coal, there could be a large financial burden on Coal India. To offset this, the company could raise the blended average linkage prices for all FSA agreements to partially offset the impact of high-priced imported coal, though there is a risk that some portion of losses due to the high-priced imported coal could end up being absorbed by Coal India itself.

Do you think the virtual backseat driving by the Government would do any good for CIL in the long run?

Well, Coal India being a Government-owned company, the Government's decisions would continue to be influenced by socio-political concerns as much as purely economic considerations.

Investors need to take cognisance that CIL will likely have to ensure fuel supply to power producers at reasonable prices so that the power tariffs for end-consumer (general public) do not rise significantly and thus keep inflation in check.

In my view, the Government should try to balance the interest of all stakeholders in a way to ensure Coal India makes reasonable profits to ensure it has enough resources to meet its future capex needs, while balancing its other goals such as price stability, etc.

But, yes, there is need for the Government to at least minimise the uncertainty and ensure clear and transparent policies, especially in the case of listed companies — keeping in mind the fiduciary duty to take care of minority shareholders as well — so that investors can properly assess the risk-rewards while evaluating investments in these companies.

The Government plans to go for resource mobilisation of about Rs 33,000 crore through PSU divestment this year. What impact do you think the CIL episode would have on the divestment plans?

I do not think that the CIL episode will have any meaningful impact on upcoming PSU public offerings. Largely, it is the coal and oil and gas companies that have been subject to higher degree of intervention by the Government and this is a well-known fact.

For example, take the case of the upcoming offering of Rashtriya Ispat Nigam, which makes steel and will, as such, have a free hand on pricing.

Most of the PSUs, particularly in the oil and gas and metal space, would have to follow the Government line because of their ability to influence inflation. Do you think real corporate independence would elude them forever?

As I said earlier, the Government has to take into account political and social considerations. Hence, sensitive commodities such as oil, coal and gas producing PSUs may be continued to be influenced by the Government. However, having concrete and transparent policies would aid investors to assess the prospects of the companies in a better manner.

The Children's Investment Fund has taken up cudgels against the Government. Do you think increasingly foreign investors would take to legal recourse in the case of other PSUs as well?

Well, I can't comment on how other foreign investors would react. However, an investor must consider all the risk factors before investing in PSUs, especially energy-related companies. T

he Government too, on its part, should try and ensure that it balances the interests of all its stakeholders.

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