Is this the next 'Maharatna' that will need a bailout?

Feb 25, 2012

In this issue:
» Excise net set to widen
» Pranab's advice for Eurozone
» Realty prices to remain high in 2012?
» India's sustainable growth as per RBI
» ...and more!

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Stimulus packages and bailouts are words that are commonly heard wherever we go these days. Governments are getting bailed out. Enormous bailout packages are being discussed for countries that are facing the mounting pressure of debt. Companies are being bailed out to prevent them from going under. Banks are being bailed out. The word has been associated with nearly everything. Even in India. Companies like Kingfisher Airlines have been hitting news headlines due to their mounting financial troubles. They are desperately in need of a bailout or they risk a closure of business. But there is one company in India no one can even think of when we think of bailouts. And that company is Coal India (CIL).

With zero debt, nearly Rs 4.5 bn of cash reserves and consistent cash flows, it is unthinkable that the company would ever become a bailout candidate. After all it is the world's largest producer of coal and the demand for coal is not going to diminish anytime soon. Therefore, we were quite shocked when we read a Firstpost article that there are chances that CIL could head the Air India or Kingfisher way.

There are reasons for this similarity. The biggest reason is none other than the government itself. Rather than helping the company in its path of growth, the government is acting as a big hindrance instead. The company cannot increase its production. Production has in fact stagnated at FY10 levels. It has no control over the price of its product. CIL already sells its coal at a highly discounted price because it is not allowed to sell at the import parity prices. In fact the only thing that it sees a rise in is the employee costs. And again that's thanks to the government policies. To add to the worries is the new mining bill that forces miners to share 26% of their profits with the local communities.

This is exactly what it did to its national carrier Air India. It milked the company till it dried up into a barren land. Capping revenues while consistently formulating policies that lead to higher costs is what destroyed the company. But history was not a good enough teacher and the government is all set to repeat the same mistake. This time it seems to have chosen the very profitable and very cash rich Coal India. We just hope that the government realizes its mistake soon and does something to reverse this situation. Otherwise at some time in the not so distant future, we would end up reading news articles of the bailout plan for the world's largest coal producer.

Do you think that government policies are going to force companies into needing a bailout? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
That India has grown at a spectacular growth rate is something no one can deny. But have the people of India benefitted from this growth? If today's chart of the day is anything to go by, then the answer to this question would be no. As shown in the chart, in 2011 India ranked the lowest in terms of per capita income amongst its BRIC (Brazil, Russia, India and China) peers. The per capita income has been computed on purchasing power parity i.e., it has been adjusted for the differences in the foreign exchange rates. One reason for such a low per capita income number for India is the income divide in the country. The rich-poor gap has grown sharply over the past two decades in the country.

Data source: International Monetary Fund (IMF)
* Data for 2011

In the much awaited Union Budget 2012, the Indian government plans to bring more goods under the excise net. The one thing that this step would help is for the government to increase its revenues. In turn, it would help curb the widening gap of fiscal deficit going forward. Currently, about 240 goods are exempted from central excise. In addition to that, there is a list of 130 goods, which currently attracts just 1% excise duty. Now, the finance ministry has several options. Instead of bringing new goods under the excise tax net, it may increase the tax rate to 2% for this set of 130 goods. Also, the government may increase the standard rate of central excise duty rate, which at present is 10%.

Besides revenues consideration, the idea of bringing more goods under the excise is a forward step towards the implementation of Goods and Services Tax (GST). As under this scheme, the government needs to reduce the exempted list to 99 goods. We believe that this step would be a welcome move by the government towards the long awaited tax reforms.

A lot of countries have come forward and made their stance clear on the Euro zone crisis. But has India? If you weren't aware till now, here's another chance. India's finance minister, Pranab Mukherjee, is of the view that crisis resolution in Europe will need a credible package amongst other things. Thus, Mr Mukherjee seems to be toeing the same line as most of his counterparts in other countries.

But is this going to solve the problem? We don't think so. The problem in Europe is that of excess debt and it can be best solved by allowing bad debt to die as also through means of repayment. Supporting the existing debt with more of it as these policymakers are pointing out will only make matters worse according to us. But no one seems to be listening. Governments are hell bent on juicing the system and hoping that the extra liquidity will take care of the ills plaguing the economy. Such an approach has never worked in the past and there is no reason to believe that this time it will be different.

Well, it seems like there is bad news for folks who have been anticipating a correction in real estate prices. Economic Times suggests that property demand has increased across major cities - mainly Bangalore, Chennai, Gurgaon and Noida - in the recent past. This, in fact came as a surprise to the developers themselves, who have been holding on to prices despite rising inventory levels. However, with new launches in these markets seeing a positive response, it seems though that people will have to shell out more to move into properties in these markets in the coming future.

However, prospective homebuyers in Mumbai have a reason to smile. It turns out the island city was one metro that saw a sharp reduction in volume sales on a quarter on quarter basis. This development adds to the woes of the developers as they have been facing liquidity issues due to the high inventory levels. Will Mumbai finally see it's much anticipated price correction over the next few quarters?

Those hoping for the Reserve Bank of India (RBI) to cut interest rates in the coming months, think again! The Governor of RBI, Mr. Subbarao has categorically stated that the sustainable growth rate for India without too much inflation is 7%. This means that as soon as growth exceeds this, there are risks of the economy overheating. Given that the Indian economy in FY12 is likely to report growth close to the 7% mark, the case for RBI cutting rates. So how does India tackle this problem given that the government has ambitions of the country growing consistently at 9% plus? Surely, a 9% plus growth rate will goad inflation to rear its ugly head once again. The solution to this is to increase supply. Readers would do well to recall that inflation was persistently high for so long recently precisely because demand had surged while supply failed to keep pace on account of various structural issues. What is more, the deteriorating fiscal deficit of the government only added fuel to the fire. That is why the upcoming Budget will be crucial because the government will have to seriously address the problem of its deteriorating finances. The central bank has time and again warned the government of this. Now it is time for the latter to pay heed and get its act together.

The world stock markets closed the week on a strong note. Asian stock markets with the exception of India were up. The stock markets in Europe and US were also up on the news that the Eurozone finance ministers have finally approved the terms of a second rescue package for Greece which should avert the risk of a Greek default next month and positive economic data coming out of the United States.

The Indian stock markets were down by 2% during the week as investors booked profits on renewed worries about rising oil prices and the country's widening fiscal deficit. This was the first time in 2012 that the markets closed lower for the week. But not before gaining 18% from the start of the year till the end of last week. Foreign funds have helped drive the rally, investing more than US$ 5 m so far this year.

Amongst the other world markets, Japan (up by 4.4%) led the gains followed by China (up by 3.5%). The European stock markets also posted gains for the week with France (up by 2.2%) followed by Germany.

Data Source: Yahoo Finance, Kitco

 Weekend Investing Mantra
"There's a company behind every stock and a reason companies - and their stocks - perform the way they do." - Peter Lynch

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14 Responses to "Is this the next 'Maharatna' that will need a bailout?"


Mar 3, 2012

It is one sided article. Just go through PSU details about how they are getting orders or selling, it will revel that allmost all are working in monopoly situation. Take example of coal india, all rights for mining they have got not by auction but by allotment. If you work out excavation and logistic price you will come to know that it very less than market price. Same is with oil extraction price is about 15-20 dollar a barrel as against market price of 100-120 dollar a barrel. If make PSU to acquire the assets through open market and sale in competative market, most of PSU will be like Air India.Why Govt should not charge market price from these companies. Sale of spactrum can give the indication that what is price of naturl resource in open market as against allotment virtuall free or at very low licence fee.

Like (3)


Mar 2, 2012

Indian Govt only can make cash-rich/growing Cos;degrow by creating newer rules.
Take for egCoal India is cash rich;Govt released a little stake expecting prices to peak up;hoping to come out with a FPO;but noT SEEING A HIGH PRICE GOVT WANTS TO USE THE CASH PILE TO BUY BACK THE LISTED SHARES FROM PUBLIC TO BOOST THE VALUE;as there will be less stock,few sellers & more buyers for this RARE COMMODITY STOCK,ONLY WITH AN EYE ON AN FPO AT A MUCH HIGHER PRICE.
ALSO Govt is foolish by creating barriers for non devlpt. of coal india blocks that they have,and also sharing of profits,and making things easier for pvt sector to deveolop blocks even in restricted areas.
Govt can only make companies bleed dry/go sick and then some others cash rich govt. co. has to rescue this sick one.ALL MESS GOVT. & CO. OFFICIALS ARE MAKING MONEY.

Like (1)


Feb 28, 2012

Just now released. One more Scam by the govt on Vedanta, Cairn deal...ONGC and indian populace suffering.
Loss for India estimated at Rs. 100,000 crore (One Lack Crore)
Its a small clause (RoFR), govt has taken advantage of on the ONGC, to look for in this lawsuit by Mr. Aggarwal on Behalf of Indian citizens.
This is a big one..Another 2G?

Like (2)

vijay kr sharma

Feb 27, 2012

Interfering in the matter of the the Govt. certainly leads the problems to the co. so this is for the sack of the co. pl. don't interfere.

Like (1)

Kranthi Mark

Feb 27, 2012

History : A collection of crimes , follies and misfortunes of mankind – Voltaire.
This is the absolute business mis management. For the mutual benefits ,politicians will compromise and make these cash cows as scape goats. See in past HMT Group , AllWYN,IDPL .Government should bring more autonomous focus to the Maharatnas. Nominations to the boards should be only on meritocracy but not for the ruling party unemployed leaders employement. Or else these companies also joins the old list of bailouts.

Like (2)


Feb 26, 2012

Capping the out put cost and allowing the expenditure to increase is the suicidal approach, yes if case the loss is compensated by the Government capping the out put cost than every year the loss suffered most get the budgetary support. Otherwise, the Government is forcing the company for bankruptcy this is an action equivalent to killing the company by starvation and none can be made responsible. This is the main reason for the failure of the Public Sector Units, unfortunately none of the highest level managers cry for the starvation of the Unit to make the Government realize.

Like (1)


Feb 26, 2012

Yes,Coal India is the next Maharatna that will need a bail out.It is not just pathetic,but also frustrating that we have to live with a government made up of villains as ministers.

Like (1)


Feb 26, 2012

On the article: Is this the next 'Maharatna' that will need a bailout?
Exact reason an investor cannot hope in valueinveting or taking a position in PSUs in INdia.

Politicians cant run a company neither given several chances to prove worthy running states.

Its common understanding that Need, Value, Brain together in their Skull-eco (SKECO) System is a misnomer.


Like (1)


Feb 25, 2012

We are in a dream world. Government realising mistakes???? Our esteemed politicians who make the Govt are interested milking even a cow which will be dead soon. If it is a fat cow soon they will milk it to death. Looking forward the Air India way soon. They need huge money for food security bill from where it will come. Milk the good public sector companies and better not said.

Like (1)

S Venkatraman

Feb 25, 2012

Your views on Coal India are more applicable to the oil marketing companies. They are not sitting on cash reserves let along Rs 4.5billion that Coal India is sitting on and are debt burdened as compared to a debt free Coal India. They also cannot sell 5 of their sensitive products at import parity prices and face frequent increases in their wage bills. State Governments milk them dry with octroi, VAT and all kinds of levies.They might need a bailout sooner than Coal India.

Like (1)
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