Coal India’s Whopping Dividend: No Real Reason to Cheer

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One of the world’s largest coal miners, Coal India declares unprecedented dividend – but India is likely to depend on coal imports in 2014.

The news made headlines around the world. India’s state-run Coal India announced it would pay a whopping interim dividend of approx. US $0.47 (Rs 29) a share in the current fiscal year ending on March 31, which, according to one estimate, translates into US $3 billion in payouts.

Besides its majority stakeholder, the government of India, the high dividend is also expected to benefit another class – Foreign Institutional Investors. The “extra cash” will help the Indian government narrow its fiscal deficit (last tallied at about US $82 billion) as the government’s 90 percent shareholding in the company will fetch it about US $2.7 billion.

Last fiscal year, this company, the world’s largest coal miner by output, had paid a total dividend of about US $0.22 (Rs 14) a share. Incidentally, Coal India accounts for 80 percent of India’s coal output.

The high dividend payout news sent the company’s stock shooting up. The stock had already outperformed the market over the past month, and as of Jan. 15, 2014, had risen 4.09 percent in comparison with the Bombay Stock Exchange Sensex’s 2.77 percent rise.

According to one report in the Live Mint, the Indian government was now looking to further offset its fiscal deficit by partially divesting stakes in state-owned firms including CIL to raise about US $6.4 billion. The government is committed to limiting the fiscal deficit to 4.8 percent of gross domestic product (GDP) in the current financial year, compared with 4.9 percent of GDP last year, but in the first eight months of the fiscal year, it came close to breaching the full-year target.

As an aside, so massive has been Coal India’s dividend payout that even adversaries have welcomed it. A second report in Live Mint stated that even a UK-based fund that filed lawsuits against Coal India in 2012 said it “was happy” about the generous dividend announced by the company, but added it would not drop its legal fight for compensation it has demanded for underpricing the fuel.

So what does all this mean for the overall coal business of India, especially coking coal, which is a key raw material in the production of steel?

Coming Up: Where coal prices are and where they could go.

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