Coal India

Coal India Limited, is entering the capital market on 18th October, 2010 with an offer for sale of 63.16 crore equity shares of Rs. 10 each by the government, at a price to be decided at a later stage, through a 100% book building process. The issue, slated to be the largest primary market offering in the history of the Indian stock markets, will constitute 10% of the post offer paid-up capital of the company and will mop up around Rs. 15,000 crore. A retail discount of 5% is also being contemplated. 

The BRLMs to the issue are Citigroup, Deutsche Bank, DSP Merrill Lynch, Enam, Kotak and Morgan Stanley. The issue will close on 20th October for QIBs and on 21st October for HNI and retail category. Shares of the company will list on both BSE and NSE by Diwali i.e. upto 5th November.

A Navratna PSU, Coal India is the world's largest coal producing company with raw coal production of 43.13 crore tonnes in FY10, as also the world's largest coal reserve holder, with reserves aggregating to 6,422 crore tonnes, as of 1st April 2010. The company operates 21 coalfields with 471 mines across 8 states in India, and accounts for over 80% of India's annual coal demand of about 50 crore tonnes.

For FY10, on a consolidated basis, it reported total income of Rs. 52,592 crore with net profit of Rs. 9,834 crore, resulting in an EPS of Rs. 15.57, on an equity base of Rs.6,316 crores for the year. For Q1 FY11, the company clocked total income of Rs. 13,110 crore and net profit of Rs. 2,522 crores, resulting in an EPS of Rs. 3.99, in line with the FY10 performance.

As of 31st March 2010, the company had equity of Rs. 6,316 crore and reserves of Rs. 19,533 crore, resulting in net worth of Rs. 25,849 crore. The book value was Rs. 40.92 per share. The company enjoys debt-free status, with a net cash position of close to Rs. 37,000 crore, as on that date.  

Recently, the Kolkata-headquartered company received set-backs from two state governments, in which it operates coal mines. The Jharkhand government rejected the forest clearance for a planned railway link for coal evacuation from the North Karanpura coalfield, one of the 11 major coalfields of Coal India, producing 2.4 crore tonnes coal annually, with reserves exceeding 440 crore tonnes. North Karanpura contributed 5.5% to Coal India's FY10 production.  Another set-back was the non-renewal of mining lease in Meghalaya for the Simsong coal block.  

Rumours on the street quote the price band of CIL anywhere between Rs. 225-290 per share, which is quite a wide price band, considering the size of the offering. Presently, in the grey market, share is carrying a premium of Rs. 10-12 per share.

To make the issue a success, the company needs to attract around 16-20 lakh retail investors, which has never happened in case of any PSU IPO. Record number of investors of close to 12 lakh shareholders were in NHPC, a PSU which went public in August 2009 at Rs. 36 per share, where investors have yet to see their cost price. This will be having a negative memory in the minds of the retail investors, as majority of them are seen to be prospective investors in Coal India as well. Hence it is very much essential to make the issue attractive from retail point of view and not from institutional investors view.

The company can be largely compared with that of NMDC, which had dismal performance for FY 10 but had an EPS of Rs. 3.79 for Q1 of FY 11. Share is now ruling at 287, which has moved up by about Rs. 20, due to inclusion of stock in F&O from 1-10-2010. The share is ruling at a PE of about 18 times.  Based on this, leaving a gap of 10% between primary and secondary market price, as also deducting PE by 1 for non availability of Coal India in F&O, from the date of listing, share should get issued at 240 per share on the higher side. So price band of 225 to 240 will be seen reasonable and practical.

In view of remarks by SEBI Chief of overpricing of IPOs, and given the still hurting wounds of NHPC, government should take lead in making it attractive and it would go a long way, if retail investors make money in it. So, instead of fine cutting the band to extract maximum from IPO and debating on price band, the Govt should display courage and fix it at Rs.220 to Rs.230 per share. Fingers crossed!