Disinvestment of government stake in coal India and other commodity company is fraught with price-risk, particularly due to non-availability of comparable companies in the country. Recently, the Government of India proposed disinvestment of 5% stake in Coal India Limited (CIL) along with dilution in stakes to the tune of 15% each in National Aluminium Company Limited (NALCO) and National Mineral Development Corporation Limited (NMDC).
The
process of disinvestment in coal and mineral sector is fraught
with risks, particularly, price risks. The critical first
step in considering a potential sale of stakes is to know
the current market value of the company. Value appraisal with
regard to discounted cash flows may not always be appropriate.
Asset-based approaches should also be considered due to the
fact that the company has huge underutilized and non-operating
equipment along with reserves which are not optimally tapped.
There is substantial intangible asset base too, in terms of
first right of exploring and exploiting any coal-bearing property
and huge workforce. The CIL workforce is a unique accumulation
of geologists and mining engineers. The coal industry at the
threshold of reforms will do good to value this manpower.
Finally, the third approach of market-based methods of comparable
companies and comparable transactions may not be strictly
applicable for CIL for lack of such data. However, a comparison
of multiples of global companies like BHP, Anglo American,
and CVRD to assess the efficiency and productivity in relation
to value will be good enough a reason to carry on this exercise.
According
to a survey conducted by PricewaterhouseCoopers of the chief
executives of top 20 mining companies in the world, it came
out as a general consensus that the mining companies are generally
undervalued. The reasons for such undervaluation may be ascribed
to lack of reliable information on reserves and their values.
Even the US GAAP and IFRS do not spell out in conclusive terms
the processes and treatments for valuation, categorization
and depletion of reserves; capitalization of exploration and
initial development expenses; and impairment of associated
assets. These issues are likely to manifest in more precarious
forms in India since the companies have not been in a practice
of disclosing, or even tracking, such assets and their values. |
