A strong balance sheet coupled with limited investment avenues can make the world's largest coal producer, Coal India Ltd., a good candidate to acquire the government's stake in GAIL (India) Ltd., according to brokerage Antique Stock Broking.
After completing the deal between Oil & Natural Gas Corporation Ltd. and Hindustan Petroleum Corporation Ltd., GAIL and Oil India Ltd. could be the next companies where the Government of India would look to sell its stake to meet its disinvestment targets.
According to media reports, Bharat Petroleum Corporation Ltd. could be the likely acquirer of GAIL, and Indian Oil Corporation Ltd. could go on to acquire Oil India.
Antique Stock Broking believes that Coal India is well placed as compared to BPCL to buy the government's stake in GAIL.
Reasons:
- Coal India has a stronger balance sheet compared to BPCL,
- BPCL has several ongoing & planned capacity programs, but Coal India has limited investment avenues, and,
- Exposure to natural gas company would help Coal India reduce its 'Carbon Footprint'
Why Coal India Is Better Placed Than BPCL
The government's stake in GAIL would cost close to Rs 43,000 crore to the acquirer, considering the market capitalisation. BPCL has massive capital expenditure plans of Rs 1,00,000 crore till financial year 2021-22. If BPCL acquires debt to make this acquisition, as the current cash balance of the company is low, then the company's total debt to equity would increase to 2.5 times from current 1.1 times.
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Coal India on the other hand has low total debt, very high cash balance and minimal capital expenditure plans.
According to the brokerage, acquisition of a natural gas company would help Coal India reduce its 'Carbon Footprint', with relevance to COP-21 protocol, to which India is a signatory. In the COP-21 Protocol, parties have agreed to hold the increase in the global average temperature.
Coal India, which is in business of producing one of the most polluting fossil fuel, i.e., coal, has a higher moral obligation towards mitigation of climate change.
An investment in a natural gas company like GAIL would not only enable Coal India to fulfill its moral obligation, but would also to hedge its revenue stream from a likely drop in consumption of coal in future, when stricter norms restricts use of polluting fuels.
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