Finally dividends increase – and sharply: In our report dated 25 March 2013
(India Miners: Increasing cash balance at state-owned miners with no nearterm requirement - Will the Government opt for higher payout) we argued that
given the increasing cash balances, large operating cash flows and limited
capex, a stated high dividend payout policy (>50%) at the four-state owned
miners (COAL, NMDC, NALCO and MOIL) would be positive for both
minority and majority shareholders, and also positive for valuation multiples.
The dividend increase has finally come through, particularly for COAL,
NMDC and NALCO. As of now, in terms of cash as a percentage of market
cap, MOIL’s net cash is currently at 68% of market cap, NALCO at 54%,
NMDC at 45% and COAL is at 30%.
Not a stated policy as of now, but enough to suggest that current DPS could
at least be maintained: The companies have not given a stated payout policy
but, in our view, the current DPS could be maintained especially for COAL and
NMDC where we see little risk to earnings for the next two years. While the
companies have not embraced the ‘Net Profit-Capex = Dividends', in our view,
the recent high level focus of the Government on the increasing cash balance of
the State enterprises and the usage of the same, does suggest that a high payout
ratio is likely for the next two years at least.
Why are higher dividends positive for the company? While investors would
welcome higher dividends, we argue that it is positive for the companies,
particularly for the state-owned miners for two reasons: 1) Capital Discipline –
Given the increasing cash balance, in our view, the miners face the issue of
deploying cash and hence many capital expansion projects are evaluated which
may not fit into company strategy or the returns profile. The higher dividend
payout ensures that companies actually focus on executing projects currently on
the plate as there is no large cash balance accretion to worry about; 2) Makes a
valid case for higher profits and profitability – Given that the profitability of
these companies is essentially tied to regulatory policy and they are suppliers to
companies which are capital-intensive, higher dividends, in our view, allow the
state-owned miners to make a valid case for their profitability as the same would
be returned to the Government (which is the majority owner) in the form of
dividends (and dividend tax).
Stocks can stabilize at implied yields of 4-5% which suggests significant
potential upside, especially for NMDC: At Rs14/share of DPS, COAL would
trade at Rs350 (4% implied yield) and NMDC at Rs175. In our view, there is
significant upside to NMDC compared to COAL if stocks were to stabilize at
similar yields. While markets see COAL as an effective utility which has
demonstrated pricing power, we argue that NMDC's earnings are not as volatile
as the markets imply.
Large cash inflow for the Government: We estimate that the total payout to
the Government from the four state-owned miners in FY13 stood at Rs127bn vs
Rs89bn in FY12 and should increase to Rs134bn (at our projected DPS)
Next step should be to address the existing large cash balance: This is an
issue in particular for COAL (Rs640bn) and to a lesser extent for NMDC
(Rs200bn). We very much doubt any one-time dividend would be given out,
although we do not rule out share buybacks, particularly in COAL India
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(India Miners: Increasing cash balance at state-owned miners with no nearterm requirement - Will the Government opt for higher payout) we argued that
given the increasing cash balances, large operating cash flows and limited
capex, a stated high dividend payout policy (>50%) at the four-state owned
miners (COAL, NMDC, NALCO and MOIL) would be positive for both
minority and majority shareholders, and also positive for valuation multiples.
The dividend increase has finally come through, particularly for COAL,
NMDC and NALCO. As of now, in terms of cash as a percentage of market
cap, MOIL’s net cash is currently at 68% of market cap, NALCO at 54%,
NMDC at 45% and COAL is at 30%.
Not a stated policy as of now, but enough to suggest that current DPS could
at least be maintained: The companies have not given a stated payout policy
but, in our view, the current DPS could be maintained especially for COAL and
NMDC where we see little risk to earnings for the next two years. While the
companies have not embraced the ‘Net Profit-Capex = Dividends', in our view,
the recent high level focus of the Government on the increasing cash balance of
the State enterprises and the usage of the same, does suggest that a high payout
ratio is likely for the next two years at least.
Why are higher dividends positive for the company? While investors would
welcome higher dividends, we argue that it is positive for the companies,
particularly for the state-owned miners for two reasons: 1) Capital Discipline –
Given the increasing cash balance, in our view, the miners face the issue of
deploying cash and hence many capital expansion projects are evaluated which
may not fit into company strategy or the returns profile. The higher dividend
payout ensures that companies actually focus on executing projects currently on
the plate as there is no large cash balance accretion to worry about; 2) Makes a
valid case for higher profits and profitability – Given that the profitability of
these companies is essentially tied to regulatory policy and they are suppliers to
companies which are capital-intensive, higher dividends, in our view, allow the
state-owned miners to make a valid case for their profitability as the same would
be returned to the Government (which is the majority owner) in the form of
dividends (and dividend tax).
Stocks can stabilize at implied yields of 4-5% which suggests significant
potential upside, especially for NMDC: At Rs14/share of DPS, COAL would
trade at Rs350 (4% implied yield) and NMDC at Rs175. In our view, there is
significant upside to NMDC compared to COAL if stocks were to stabilize at
similar yields. While markets see COAL as an effective utility which has
demonstrated pricing power, we argue that NMDC's earnings are not as volatile
as the markets imply.
Large cash inflow for the Government: We estimate that the total payout to
the Government from the four state-owned miners in FY13 stood at Rs127bn vs
Rs89bn in FY12 and should increase to Rs134bn (at our projected DPS)
Next step should be to address the existing large cash balance: This is an
issue in particular for COAL (Rs640bn) and to a lesser extent for NMDC
(Rs200bn). We very much doubt any one-time dividend would be given out,
although we do not rule out share buybacks, particularly in COAL India
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