Constrained by an archaic legal framework that looks only at standalone financials, Coal India (CIL) may not be able to dole out as large a payout immediately as may be anticipated. Dividends are, by law, restricted to accumulated standalone earnings (R22/share of R14,200 crore based on FY13) and buyback is restricted to 25% of standalone net worth (2.7% of outstanding equity or R5,100 crore).
CIL’s standalone reserves and net worth were R14,200 crore (R22/share) and R20,500 crore (R32/share) against gigantic consolidated reserves and net worth of R42,100 crore (R67/share) and R48,500 crore (R77/share), respectively, on March 31, 2013. Standalone cash of R29/share constitutes only 30% of consolidated balance. CIL has a standalone cash balance of R18,100 crore (R29/share) against consolidated cash balance of R62,200 crore (R98/share).
The standalone entity has only 30% of the consolidated cash balance primarily composed of dividend income from subsidiaries. Annual dividend income for various CIL subsidiaries was R9,100 crore in FY13 with payout ratios of more than 60%.
CIL will need payment of higher dividends from subsidiaries to liquidate the consolidated cash balance though it may be constrained by lower accumulated reserves that may restrict repatriation of cash flows. Reduced cash balances or visibility of better pay-outs can aid re-rating.