New Delhi: Prime Minister Narendra Modi’s plan to sell 10% of Coal India Ltd by March is being imperiled by the company’s sliding shares.

The decline is posing an obstacle, said two finance ministry officials in New Delhi, asking not to be identified because they weren’t authorized to talk with the media. The shares have fallen 14% from a one-year peak in June and dropped 3.7% in the past month. If the Coal India stake sale doesn’t happen in the current fiscal year, an alternate plan including sales in smaller state-run companies is being prepared, they said.

“Selling Coal India in this market would mean a distress sale," said Deven Choksey, managing director at Mumbai-based brokerage KR Choksey Shares and Securities Pvt. “The government has to have a different plan."

Modi, who pledged everything from cheaper prices and better infrastructure to round-the-clock electricity and water in his march to power last year, aims to raise 58,400 crore from share sales to cut the budget deficit to the lowest in seven years. While Coal India, which has 62,300 crore in cash, appears an easy target, some investors in the world’s biggest miner of the fuel are disappointed with its performance and wary of its promise to double production in the next five years.

The shares rose as much as 2.4% to 371.75 the most in more than three weeks, and traded at 367.50 as of 9:40am in Mumbai. The stock’s closing price on Wednesday was 15.76 times the company’s per-share earnings in the year ended 31 March, compared with a 19.1 times price-to-earnings multiple for the benchmark BSE S&P Sensex.

Special dividend

In the absence of a sale, the government has the option to draw a special dividend from the company. Coal India paid a record dividend of 29 a share for the year ended 31 March 2014, after a share sale plan failed amid opposition from the unions.

Kolkata-based Coal India, which accounts for 80% of the nation’s output of the fuel, has failed to meet its production targets at least since its trading debut in 2010. A shortage of coal has forced manufacturers to turn to overseas purchases, paying a higher price. Increased output would enable Coal India’s customers, including power plants, steel mills and cement factories, to cut cost and India’s import bill.

Higher production

“The trigger investors are looking at how Coal India can ramp up production," said P. Phani Sekhar, a fund manager at Karvy Stock Broking in Mumbai. “For that to happen, the government has to create an enabling environment. It has to speed up approvals and make sure the company gets land to mine. You can’t keep raising production from the same mines every year. For a substantial increase to happen, you have to increase the area under mining."

Coal India produced 462 million metric tonnes from 429 mines in the year ended 31 March. The company, which plans to ramp up production to 507 million tonnes by 31 March, has failed to start new mines because of tough land acquisition laws, delayed environmental clearances and a shortage of railway tracks, factors that have impeded Modi’s efforts to revive economic growth.

All that may change with Modi’s recent initiatives. The government is working to resolve issues on railway connectivity, speed up environmental clearances and adopt modern mining technology.

“Coal India’s board will soon consider a plan to raise output to 925 million tonnes in five years," coal and power minister Piyush Goyal said in an interview with Bloomberg TV India. That would require an annual production growth rate of 15% in the next five years, more than five times the pace in the last five.

‘Unprecedented challenge’

“The task is an unprecedented challenge," said Rahul Jain, who advises clients of Mumbai-based CIMB Securities India Pvt. to reduce their holdings in Coal India. “The company will have to go through a radical change in mindset."

Last month, the government issued an executive order to make it easier for companies to buy land. The ordinance, one among four issued, exempts at least five categories of land, including industrial corridors, from rules that require the consent of at least 70% of the owners. The orders will lapse if they are not approved by parliament in the session that starts next month.

“We need three things to raise production," Coal India technical director Nagendra Kumar said in an interview. “We need approvals, land and evacuation. If all those are available, there is no reason why we shouldn’t be able to lift our output."

New projects

Coal, which fires about 60% of India’s power generation, will remain its main source of energy for decades. To strike an environmental balance, the government is pushing solar and wind power projects and asking thermal power plants to invest in renewable energy projects and replace plants older than 25 years.

Coal India is working on 149 new projects, with a combined capacity to produce 539 million tonnes a year, according to a 1 January report by Mumbai-based Antique Stock Broking. These projects produced 255 million tonnes in the year ended 31 March, several of them constrained by a lack of environment approvals and railway lines that would help ship the mined coal, according to the report.

“We have a mine-by-mine plan," Goyal said. “We want to make Coal India the world’s most valuable coal company."

Among listed coal companies, Coal India’s $36.9 billion market value is second only to China Shenhua Energy Co.’s $64.5 billion as of Wednesday, according to data compiled by Bloomberg.

The government has been able to resolve at least one issue that has traditionally hindered share sale plans in Coal India: union opposition. This time around, the workers are convinced that a disinvestment would not be to their detriment, Goyal said.

“They have no concerns now," Goyal said. “It doesn’t mean denationalizing Coal India. The management control will remain with the government." Bloomberg

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