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INTRODUCTION TO COAL INDIA
Following are some details on Coal India's operations:
FACTS AND FIGURES
• • • • • Coal India was founded in 1973 when the government nationalised many coal mines to boost output under its own supervision. The company made a net profit of 98.337 billion rupees ($2.21 billion) in 2009/10 (April-March) on revenues of 525.922 billion rupees. A 10 percent sale for $3.5 billion would imply a total value for the company of $35 billion with total share capital of 63.16 billion rupees. The company produced 431.26 million tonnes of coal in the year ending March 2010, up 6.82 percent year-on-year. CIL is responsible for ~82% of India’s Coal Production from its 471 Mines in 8 states. The Company has been growing production at 8-9% in the last 2 years though most of it is lower grade non-coking coal. • • • India is the 3rd largest producer and consumer of Coal in the World with 77% of India’s power generation dependent on Coal. The monopoly producer accounts for over 80 percent of India's total coal output and is targeting production of 461.5 million tonnes in the current year which started in April. Coal India is the Largest Coal Producer in the World with 400,000 employees. It is a Holding Company with 7 subsidiaries one of which mines coal in Mozambique. The company is increasing benefaction of Coal which will lead to more value add and higher prices. The company is expanding capacity to meet the 11.3% CAGR for coal demand in India for the next 5 years.
55 rupees) ADVANTAGES • India’s Fast Growing Economy is Dependent on Coal Energy – This guarantees a stable growing Demand for its Products which is unlikely to change in the Future. 2 . CIL is capable of exporting its products if in the case that Domestic Demand Declines. Coal powers 75 percent of India's electricity output.• It wants to expand overseas to bridge the yawning gap between India's demand and supply. Coal India will face competition from foreign miners as the government moves to reform the coal sector and allow non-domestic players to bid for blocks in joint ventures. Maoists. The country. CHALLENGES • • • • Social problems are an obstacle to mine expansion with resistance from locals who are concerned about displacement. The company has a total of 18. • After selling shares. Due to its low costs.9 million tons of total reserves of which 10.1 million tons are proven. who say they are opposed to capitalism and have attacked some other staterun firms in east India.to keep power cheap -. are another hindrance to expansion. which faces a peak-hour power deficit of nearly 14 percent. Bloated stocks of coal because of slow transportation have prompted top officials to consider moving into power generation to use the inventories. Indonesia and the United States.and keeping investors happy with profits and dividends. • • • Coal India has been importing small amounts of coal and plans to issue a tender for importing 6 million tonnes of coal this year mostly for power-maker NTPC Ltd. and is in talks for buying mining stakes in Australia. it will have to review its policy of discounting coal in order to strike a balance between its social obligations -. plans to triple its generation capacity over the next decade. ($1=44. and annual demand is expected to swell at 11 percent on rising power generation.862.595.
Besides the other coal consumption sectors like Steel and Cement are also growing at an equally fast pace. COAL INDIA IPO --INTRODUCTION Coal India Ltd. This means that if CIL sold Coal in the International Market it would earn a Gross Margin of almost 80%. • Huge Difference in International Price and CIL’s Coal Cost – The International Price of the cheapest grade of Coal was $72/ton declining about 40-50% from 2008 highs. There is huge scope of growth since China at 3 Billion Tons produces almost 6 times as much coal as India does. India’s coal imports surged 16 percent in the year ended March 31 as power plants burned more of the fuel to meet demand in Asia’s second-fastest growing major economy. Fifteen of 18 investors surveyed by Bloomberg News said they plan to bid for shares in the world’s largest coal producer. India is already importing around 66 million tons of coal which is going to increase rapidly. may sell as much as 151.7% of the World’s Coal Reserves with geological resource of 277 Billion Tons. However the Reserves would run out much faster that is in less than 50 years at growth rates of around 810% per annum.• Coal Based Power Generation to increase by 60% in the next 4 years with Demand Outpacing Supply driven by Private Sector Capacity Additions from 86 GW of Coal based Energy Generation at Present.4 billion) of stock in the nation’s biggest initial share sale as investors bet surging energy demand will override environmental delays for new mines. • Largest Reserves in the World implying 138 years at Current Production Rate The company has identified around 64 Billion Tons of Coal Reserves which would imply 138 Years of Reserves at a Production Rate of 500 million tons a Year. 18. with the proceeds helping the government narrow its budget deficit. The cost of production for CIL average just about $16/ton. Coal India 3 . Note India is supposed to have 6.5 billion rupees ($3. starting Oct. The stock of the state-owned company will be sold in a range of 225 rupees to 245 rupees each.
The country’s benchmark Sensitive Index has gained 15 percent so far in 2010. Bank of America Corp. Citigroup Inc. and Morgan Stanley will manage Coal India’s offering... data compiled by Bloomberg show. in January 2008. RAISING FUNDS Prime Minister Manmohan Singh’s government plans to sell shares in state-run companies to raise 400 billion rupees this year to trim a budget deficit.will seek environmental clearances from the government to mine in densely forested areas in states including Jharkhand and Chhattisgarh estimated to hold half of its future output. Kotak Mahindra Capital Co. Deutsche Bank AG.. making it the best performing gauge among the world’s 10 largest stock markets. Enam Securities Pvt. Indian companies have raised a record 806 billion rupees in equity and rights sales this year. 4 . The sale of a 10 percent stake in Coal India could help the government meet about 38 percent of the asset-sale target and may top the 116 billion rupees raised by billionaire Anil Ambani’s Reliance Power Ltd.
U. more than initially estimated. According to a poll. is seen as attractive relative to listed global peers. The reason behind it is the stock market rally and strong interest in the company. final pricing Oct 23 * Coal India accounts for about 80 pct of India's coal output * IPO set to revive momentum for govt's share sale plan The initial public offering (IPO) of the world's largest coal miner. the Indian miner's closest rival. Global mining firms typically trade between 12 to 16 times historical earnings but given their relative scarcity.63) a share. The valuation. Coal India. based on a poll of 11 fund managers in India. trades at 16 times earnings. Coal India IPO Set To Ride Bull Market Coal India IPO set to ride bull market By Agencies * A poll sees IPO price range of 220-280 rupees a share * Deal seen priced near lower end of global peer range * Gov't may set IPO price range Tuesday. is likely to fetch $3.60 rupees for the fiscal ended March 2010. Coal India reported earnings per share 15. Here is some of the opinoin about the valuation. or 16 times trailing earnings. The P/E for CIL will be around 16 times.VALUATION AND ADVANTAGES The Overwhelming Opinion is that the Coal India IPO is cheaply valued and should lead to immediate listing gains for investors. miner Peabody Energy trades at 25 times earnings. A. pure-play coal miners command a valuation premium. while smaller Indonesian peer Adaro Energy has a price-to-earnings ratio of 20 times.5 billion.S. potential investors in state-run Coal India's IPO expect the issue to be priced around 250 Indian rupees ($5. Hong Kong and Singapore. valuing it at $35 billion and placing it among the top Indian firms by market value. China's Shenhua Energy. with most of those surveyed keen to invest in 5 . Trailing P/E compared to 18-25x for comparable peers.
If the pricing is attractive. Their business model and costs are different from other global peers. or 10 percent of the company. but the kind of dominant share Coal India holds in its market is unique. holds a dominant position in this fastgrowing market. Retail investors and staff will get a further five percent discount on the final price. Coal India. Chief Investment Officer at Principal AMC in Hong Kong. This is basically a play on India's growth story. On Tuesday. Indonesia that offer upstream coal exposure. most global players would want to invest into the stock. 23. a Mumbaibased sector analyst at Macquarie Research. 6 . HUGE MARKET Coal powers 75 percent of India's electricity output. Australia. said Rakesh Arora. Previous share sales in state firms this year had discounts of between five and eight percent.6 million shares. and annual demand is expected to swell at 11 percent on rising power generation. The government is selling roughly 631. plans to triple its generation capacity over the next decade. based in the eastern city of Kolkata. said Binay Chandgothia. which faces a peak-hour power deficit of nearly 14 percent. Coal India denied a report in the Economic Times newspaper which said the government panel is likely to recommend a price band of 220-240 rupees a share for the offer. A government panel is likely to set a price band for the IPO late on Tuesday before order books are opened on Oct. in what is on track to be the largest IPO in Indian corporate history. There are other companies in China. The poll drew a price range expectation of 220 rupees per share to 280 rupees. 18 and the final price is set on or around Oct. The country. The state monopoly produced 431 million tonnes in 2009/10 and accounts for nearly 80 percent of coal output in Asia's third-largest economy. and I think the risk factors are lower.the Indian miner.
CARE. So short term IPO traders who want to make a quick buck in the market can expect some profits on the listing days. These are expert opinions which are subject to market risks 7 . 245 and can expect to see a listing price anywhere from Rs. Analysts believe that more technological advances will help Coal India to get more profits in long term. For the long term investors also. ICRA and other This is the first IPO in India which will have the listed company direct entry into Nifty 50 and Sensex 30 indices This is the first IPO for which there will be a direct entry into the derivatives (futures & options) segment Investors should take the call as per their risk appetite. 265 to Rs. the market mood is expecting the returns on Coal India IPO to be around 30% that too on the upper side of the price band on the listing day Many experts and analysts believe that the offered price band of Coal India IPO which is set at 225 to 245 Rs. India is a fast growing market and Coal India holds the monopoly in Indian coal market. 265 to Rs. all of them are claiming that this will surely be a premium listing. However. 330. Actual valuation might take it to Rs.Coal India sells two-thirds of its total output to power companies and utilities account for its top five customers. 330 levels and that is what the various market analysts are expecting to be the traded price on the day of listing for Coal India IPO. Majority of the brokerage houses in India and abroad are recommending that investors should subscribe to the Coal India IPO at the higher price band of Rs. so it is recommended even for a long term hold. There are many good points about this Coal India IPO: This is the first IPO in India which has received 5 out of 5 ratings from all three rating agencies . This might look a bit wide range. but that is what the various market opinions are. per share is lower. B. the situation is expected to be good. Coal India IPO: Expect 30% Returns On Listing Day: In general.
"The issue is aggressively priced. A benign IPO pricing would have left something for the investors in the near term as well.7 times the company’s 2009-10 consolidated earnings. While the pricing is slightly higher than what most analysts had projected earlier. Coal India’s IPO has many firsts to its credit. the final pricing at Rs 225-245 appears to be higher.4-15. It would have helped in attracting retail investors if the price had been in the region of Rs 200 a share. which is opening on October 8 . the stocks PE works out to 14. with the government announcing a price band of Rs 225-245. "Nevertheless. experts suggest that given the somewhat aggressive pricing.752 crores at the upper price band." Shah added.54. and the Street seems divided on this. For instance. most experts and analysts had estimated the IPO to be priced in the range of Rs 200-220. The offer." said Mayank Shah. a few had also pegged the company’s value at Rs 234-344 per share. which values the company at Rs 1. Even after considering that the market (Sensex) has risen 4 per cent since then. Street Divided On Coal India’s IPO Pricing The wait for Coal India’s initial public offer (IPO) pricing is finally over. the retail portion of the IPO could now get oversubscribed by a little over one time. Meanwhile. However. The other first is that its IPO. At this pricing.C. will be the biggest ever India has ever witnessed. chief executive officer at Anagram Capital. They argue that had the pricing been as expected earlier. the IPO could have seen higher retail interest. which indicates superior fundamentals compared to any other listed company. based on different valuation methods. investors can still expect 10-15 per cent returns in the next one year. it is the first one to be accorded a rating of 5/5 by rating agencies. the pricing has come as a surprise. While Coal India’s prospects and fundamentals are good. Last month. in terms of value.
bankers are expecting some volatility in the forex market. as well as robust cash flows. It has the world’s largest proven coal reserves of 52. the company makes a healthy 27 per cent operating margin.000 crores from the primary market. the company’s reserves would last for over 100 years. This is about 70 per cent higher that Reliance Power’s IPO in January 2008. FII interest in Coal India IPO to disturb forex market MUMBAI: Even as foreign portfolio investors are lining up cash to subscribe to the $3. because of huge dollar inflows. any move towards market-based pricing would provide further triggers.51 to the dollar on Wednesday. The rupee closed at 44. Nevertheless.500 million tonnes (mt).450 crore over the next two years.475 crores at the upper price band. Its annual production is estimated at 460 mt for 2010-11. Overseas investors have net-bought over $22 billion of shares in 2010 so far.” says Hemant Mishr. At least 50% of the issue is reserved for qualified institutional buyers (QIBs). what places Coal India in a favourable spot is its status of being the world’s largest coal miner and a dominant 81 per cent market share in the country. MD and head global markets at 9 . compared to international benchmark prices). a leading rating agency. “The forex market is on tenterhooks in anticipation of lumpy flows in wake of significant investments coming in for Coal India. While a majority of the company’s coal is sold at notified prices (almost 60 per cent lower. will help the government garner Rs 15. which rose about Rs 9. Its huge cash and bank balance of Rs 39.18. Assuming constant production at these levels. and foreign investors are expected to bid for a sizeable chunk of that quota. accounting for almost 48 per cent of Indiaâ€™s total reserves. and has gained over 4% in the past one month alone.4billion Coal India initial public offering (IPO). and most brokers expect the momentum to sustain for the rest of this calendar. Pricing apart. aided by its low cost of production. would enable the company to pursue growth opportunities globally and also comfortably fund its capital expenditure plans of Rs 8. believes Crisil.000 crore as on March 2010.
4-billion IPO stands heads and shoulders above those of Reliance Power ($2.” says Tirthankar Patnaik. “These sectors could come under pressure. This will exacerbate the impact on the rupee he added.2 billion). chief strategist at Religare Capital. infrastructure and construction.1 billion) which have been among the top 5 India IPOs so far. Coal India’s $3. The interest in CIL is also expected to see a spurt in domestic institutional flows “Insurance companies are sitting on cash. “Going by the trend of portfolio flows. investment demand for CIL is such that some portfolio investors are also weighing the option of liquidating a part of their holdings in sectors like banks.Standard Chartered Bank. NHPC ($1.2 billion).” said a senior strategist who is of the view that FIIs have been overweight on these sectors and are looking to exit for sometime now. mutual funds will have to churn portfolios to take positions.” says Mr Patnaik of Religare Capital.” said the head-custody at a foreign bank.9 billion). Brokers and fund managers expect the IPO to be subscribed 4-5 times at the very least. and the remittance is expected to come in by October 20. “Gross FII data reveal that inflows are much higher than anticipated.2 billion). FIIs are likely to bring in fresh capital for institutional bidding. which have given good returns lately. but given the interest in CIL. He expects the rupee to hit 43. officials maintain that volumes are up by 20%. Though FIIs typically put in their bids on the last day. Fund managers maintain that close to $6-8 billion in cash has already come in. The issue opens for subscription on October 18. While data available with custodians of leading foreign banks may not determine a pattern in the run-up to the IPO. DLF ($2. He believes there are indications that some savvy investors have planned ahead as a firm rupee base will move against them. TCS ($1. and as much as 10 times. on the higher side. Cairn India ($1.50 in a knee-jerk reaction on the day the money comes into system. 10 .
CARE. up 165% from the same period in 2009 that saw IPO proceeds of only $36. Besides.6 billion. CIL's strong financial position with cash balances of Rs 39. The grading also factors experienced management and impressive track record of operations.3 billion. CARE said in its release.2 billion from 548 issues. CARE assigns 'IPO Grade 5' to Coal India's IPO MUMBAI: Rating agency. on Monday said it has assigned a ' CARE IPO Grade 5' grading to the proposed initial public offer (IPO) of Coal India Ltd. Moreover. beating 2007’s full-year proceeds of $93. India. with combined proceeds of $17. and Singapore. Thus practically. RISKS AND NEGATIVES WITH HIGHLY RATED COAL INDIA IPO 1) Low Quality of Coal Reserves – Indian Coal is of typically low content with high amounts of impurities making it unusable in industries like the steel industry where 11 . year-to-date IPO volumes for Asia (excluding Japan) total $97. CIL holds the monopoly in traded coal available domestically. The balance 18 per cent is produced mainly for captive consumption by manufacturing/power companies. the buoyant equity capital market activity for issuers in Asia (excluding Japan) continued its momentum with the launch of four record-breaking IPOs in Australia. CARE pointed out the assigned grading reflects Coal India Ltd (CIL)'s dominance in the Indian coal industry. CIL contributes to around 82 per cent of coal production in India.8 billion. Malaysia. indicating the "strong fundamentals" of the IPO. Year-to-date Asia (excluding Japan) IPO proceeds are the highest same-period volume on record.077 crore with a comfortable gearing ratio give it immense financial flexibility to fund its on-going and planned expansion projects. According to data from Thomson Reuters. CIL is one of the lowest-cost producers giving it an pricing edge over imported coal. a press release issued here stated.Over the past week.
4) Growth Rate is not Fantastic by Any Means – CIL has managed a decent growth of around 10% which it will find difficult to accelerate despite huge demand due to its not so competent management and organization. It is already well known that Coal has huge pollution and health costs. it might not be a multi-bagger in the near future. and BPCL have a long history of subsidies and losses. 3) Dangers of Being Government Owned – Government owned Fossil Fuel Companies like IOC. It Mining Operations are hardly efficient and its expertise in Underground Mining of coal as opposed to Open Casting Mining is quite suspect. The Company prices its products significantly below international market costs which has little justification. 2) Inefficient Mining Practices – CIL is not exactly a well run modern mining company on the lines of BHP Billton or Rio Tinto. Its no wonder that Coal India’s Advertisements show A forestation Measures to try and bolster its Green Credentials.CIL being government owned will definitely come under the ambit of this proposed law leading to a potential decrease in profits. A Global Carbon Tax or 12 . The Company with a long history tracing to British days is organized haphazardly with a number of subsidiaries. Though the Company manages to get 15% Net Margins. The profits and losses of these companies despite being listed on the public markets are subject to the whims and fancies of the government. Mercury poisoning. 5) Global Carbon Tax and Climate Change Legislation – Coal is the Dirtiest form of Energy and its cheapness is due to the fact that implicit costs on the society are not added to Coal. So while CIL should be a good safe investment. The Government is planning a new legislation which will lead to giving of 20% of profits of mining companies to local communities.higher quality is a must. it could change drastically depending on the fickle nature of the Party in Power. Degradation of Land and Ecology are some of the other negative environmental effects of Coal Mining and Usage. ONGC. But make no mistake CIL is the biggest polluter in India. Also low calorific content of coal makes CIL Coal of lower value leading to lower realizations. The Company’s structure won’t change radically with public listing overnight.
there are risks. I think that Coal India is one of the best quality stocks to come out in India’s Primary Markets. As with every investment however safe it might look. that prudent risk management can be done which is essential to successful investing. This does not mean that investors should be fearful of every investment. Coal India suffers big losses though it is not been adequately disclosed in the Red Herring Prospectus. 13 . The Coal Mafia in India is a powerful one with government links. Stealing and Pilferage is an Institutionalized Form of Corruption in India. Jharkhand subsist through stealing of Coal.something to that effect might radically change the structure of the Coal Industry quite negatively 6) Pilferage and Corruption – Illegal Coal Mining. It is by being aware of the risks. Summary Despite the above Risks. Whole Villages in India’s Coal Belt in West Bengal. However investors should be wary of the risks which will be glossed over by the mainstream media and brokerages.
one needs to look at the valuations of the company and how well it is placed with regard to the competitors. Hence Power companies are expected to benefit. This does not mean that investors should be fearful of every investment. As with every investment however safe it might look. The power needs for the country are increasing day by day. It has 63 billion tonnes of coal which makes Coal India the world’s largest reserves of coal. However. However investors should be wary of the risks which will be glossed over by the mainstream media and brokerages. this IPO is expected to be the largest. It is by being aware of the risks. hence they will benefit. Remember Reliance Power IPO and what happened to it on the day of listing? Despite the above Risks.What Are The Analysts Recommendations For Coal India IPO? Coal India is owned by the government of India which is planning to raise around 15. Coal India is one of the best quality stocks to come out in India’s Primary Markets. this is found to be having strong fundamentals. Infrastructure developments are on the rise with a stable government at the center. The government is also expected to offer the shares of coal India limited at 5% discount to retail investors. The reason is that this is much awaited IPO and investors will take out money by selling their existing shares in the market to apply for this IPO. one must not go only with the recommendations. However. Being a government controlled Navratna Company. that prudent risk management can be done which is essential to successful investing. Hence this IPO should be definitely subscribed to.000 Crore Rs. through this IPO of Coal India. Majority of the market experts and analysts say that this IPO should be subscribed to. 14 . After Reliance Power IPO. there are risks. and it is even being cited that due to this IPO there might be a fall in the market.
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