Not Just DISCOMs, Even Coal India and NTPC has a case for Privatisation

 

The Power sector can be divided into 4 sub-sectors vertically which spans from the Energy source-generation-transmission-distribution and ultimately energy reaches the consumer.

 



Figure : Power sector overview

Source:  Analytical Reports (prsindia.org)

The Market structure is below across each of the vertical:



Figure : Market structure of Power sector- Dominance of Coal India in energy sourced and NTPC in Generation

Source: https://prsindia.org/policy/analytical-reports/overview-power-sector

The full scale privatization of the sector would mean that the govt. fully exits the sector from all its arms barring the regulatory arm and maintenance of the grid as a public good. The investment decisions made by private actors generally are not only keeping into consideration just one arm of supply chain. Even if there is a privatized DISCOM, an overwhelming public sector GENCO like NTPC with disproportionate market share can influence purchase decisions. Similarly, if there is a coal supplier like Coal India, it can influence the coal policy significantly. If government exits the sector fully, it will mean that all the coal mines will be auctioned, all the Generating companies will be privatized and all DISCOMS will be privatized with a public grid system managed by government where the content (retail electricity and carriage (wires) are separated. The Wire and transmission network which are inherently monopolistic in an area of supply can be state owned connected to grids but is available for all DISCOMS in non-discriminatory manner and the consumers should have retail choice of DISCOMs.

Let us not restrict ourselves to just privatisation of DISCOMs in case we want to contain the overall losses of the power sector. I propose to also to extend the privatization to the generation and energy sector as well.

Ø  NTPC, which has 24% market share in generation of power and Coal India limited (CIL) which has 84% market share in coal production are both Public Sector Unit (PSUs). With such a disproportionate presence in the value chain, these two PSUs can influence independent commercial decisions of DISCOMs by influencing the input cost quite substantially. If market forces are to play out fully in this sector, the govt. must exit from all the ends of value chain and privatizing Coal India and NTPC would be a good starting point.

Ø  The state may not maintain any significant share holding in these companies as these are operationally profitable companies. These would also not require any significant transition support unlike DISCOMs due to commercial viability constraints.

Ø  Coal India has 8 subsidiary companies (Bharat Coking Coal Limited (BCCL), Central Coalfields Limited (CCL), Eastern Coalfields Limited (ECL), Western Coalfields Limited (WCL), South Eastern Coalfields Limited (SECL), Northern Coalfields Limited (NCL), Mahanadi Coalfields Limited (MCL) and Central Mine Planning and Design Institute (CMPDI)) (Ministry of Coal, coal.nic.in). When ownership structure of Coal India is changed through sale of equity to private players, all these subsidiary companies should also be part of the privatization.

Ø  In March 2023, Coal India had workforce of 2.59 Lakh and a total wage bill of Rs.49, 409 Cr (Keshri, May 2023, Deccan Herald). For employees of Coal India who do not wish to transfer to the privatized companies can be given a one-time VRS scheme with a lump sump fund of Rs. 86,465 Cr. The fund can be generated from the corpus generated through the sale of equity.

Cost of VRS for Coal India:

Why this is the right time to Privatise Coal India?

Ø  As on March 2023, the government of India held 66.13% shares in Coal India (Gohel, June 2023, Live Mint) and had a market cap of Rs. 2,76, 614 Cr (Money control, live dashboard, 5th April). Using the Market Cap method, the valuation of outstanding shares held by government would be Rs. 1,82,225.67Cr. However, if a Discounted cash flow method considering Rs. 35,686 Cr of operational cash flow in March 2023 (Money control Dashboard, Cash flow Coal India),  growth rate of 4.2% (Simplywallst, Dashboard, Coal India future growth) and a discounting by WACC of 13.25% (Gurufocus, dashboard, Coal India) the valuation comes down to 1,47,383 Cr. This is divergence of ~19 % factoring for growth of renewables and availability of cheaper capital in renewables through climate funds. It indicates that the today is the right time to privatise coal India when the stock is still overvalued so that there is a robust disinvestment corpus is built.

Ø  Further given the no. of staff of Coal India is very high, chances of disputes with union will be a strong impediment to privatise. The remaining corpus after provisioning for VRS (Net Rs. 95,759 Cr) can be used for Coal India employee welfare fund.

 

Ø  Valuation of Coal India using Market Cap


Ø  Valuation of Coal India using Discounted cash flow method


Why is this the right time to Privatise NTPC?

Ø  Similar Privatisation bid can be made for NTPC wherein Government of India has a shareholding of 51.1% (NTPC shareholding, live mint Dashboard).

Ø  In March 2022, NTPC had workforce of 15,786 and a total wage bill of Rs. 5289.51 Cr(NTPC annual report, August 2022, Page 33, bseindia.com). For employees of NTPC who do not wish to transfer to the privatized companies can be given a one-time VRS scheme with a lump sump fund of Rs. 9,256.64 Cr. The corpus generated through the sale of equity can fund this cost.

Ø  As on March 2023, the government of India held 51.1% shares in NTPC and had a market cap of 3,43,330 Cr (Total outstanding share * current share price). Using the Market Cap method, the valuation of outstanding shares held by government would be Rs. 1,75,441.64 Cr. However, if a Discounted cash flow method considering Rs. 35,388 Cr of operational cash flow (NTPC annual report AY 21-22, page 115, ntpc.co.in) and EPS growth rate of 9.9% (Simply wall street, NTPC share overview)26,  and a discounting by WACC of 12%(Valueinvesting.io, Dashboard, NTPC WACC), the valuation comes down to 1,48,49Cr. This is divergence of ~15 % factoring for growth of renewables and availability of cheaper capital in renewables through climate funds. It indicates that the today is the right time to privatise NTPC when the stock is still overvalued so that there is a robust disinvestment corpus built.

Cost of VRS for NTPC

Cost of VRS of NTPC

Employee Cost of NTPC (in Cr) as per FY21-22 annual report

5,290

Assumption of remaining tenure (in years)

20

Assumption of % of employee cost under VRS (in %)

70%

Total  Lumpsump amount (in Cr) assumed to be Annual payment of 45 days salary for remaining service years

      9,256.64


Valuation of NTPC using Market Cap:




Valuation of NTPC using Discounted cash flow:


This is is expected to yield result by the end of FY 27 in terms of loss containment and operationally positive cash flow (Zero ACS ARR gap)

In In conclusion, we need not stick to only privatisation of DISCOMs. It is time we think about the whole value chain of power sector and look at coal producers and power generators as part of the cleaning up required to make a viable the power sector in India.

References:


1)    Ministry of Coal, coal.nic.in (https://www.coal.nic.in/en/about-us/agencies-under-ministry)

2)    Gyanendra Keshri, May 2023, Coal India sets aside Rs. 8,153 crore for higher wages, Deccan Herald (https://www.deccanherald.com/business/coal-india-sets-aside-rs-8153-crore-for-higher-wages-1216587.html)

3)    Ankit Gohel, Jun 2023, Coal India OFS: Government to sell 92.44 lakh share at Rs.221.6 a piece on Jun 21 to eligible employees, Livemint (https://www.livemint.com/market/coal-india-ofs-government-to-sell-92-44-lakh-shares-at-rs-226-10-apiece-on-june-21-11687155502193.html)

4)    Money control, live dashboard, 5th April 2024 (https://www.moneycontrol.com/india/stockpricequote/miningminerals/coalindia/CI11 )

5)    Money control Dashboard, Cash flow Coal India, (https://www.moneycontrol.com/financials/coalindia/consolidated-cash-flowVI/ci11)

6)    Simplywallst, Dashboard, Coal India future growth (https://simplywall.st/stocks/in/energy/nse-coalindia/coal-india-shares/future#:~:text=Future%20Growth&text=Coal%20India%20is%20forecast%20to,be%2036.4%25%20in%203%20years.

7)    Gurufocus, dashboard, Coal India (https://www.gurufocus.com/term/wacc/NSE:COALINDIA/Weighted+Average+Cost+Of+Capital+%2528WACC%2529/Coal+India+Ltd#:~:text=As%20of%20today%2C%20Coal%20India%27s%20weighted,average%20cost%20of%20capital%20is%2013.31%25%25)

8)    NTPC shareholding, live mint Dashboard (https://www.livemint.com/ntpc/share-holdings/companyid-s0003057)

9)    NTPC annual report AY 21-22, page 115, ntpc.co.in (https://ntpc.co.in/sites/default/files/annual-report/complete-reports/Annual-Report-2021-22.pdf)

10) Valueinvesting.io, Dashboard, NTPC WACC (https://valueinvesting.io/NTPC.NS/valuation/wacc )

 




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