COAL INDIA IPO

------
A GAME CHANGER FOR
INDIA?
 Coal India Limited (CIL) is coming out with an Initial public offering on October 18,

2010  in which the Indian Government will divest a 10% stake in the company for
around $3.3 Billion giving the company a market valuation of $33 Billion.

 63 million shares will be offered in this public issue with a 5% discount for retail

investors. This will be the largest Indian IPO till date and give investors access to
monopoly Coal Producer of the country. With massive reserves, huge captive domestic
demand and steady growth, the company offers a safe investment venue for investors.

 Risks with this company are little given India’s fast growing economy’s dependence on

coal powered energy. Despite Coal being the dirtiest form of Energy, its cheapness
and abundance has made it the Fuel Source of Choice for India’s numerous new  power
producers. Despite Global Warming Concerns, King Coal is not going to end its reign
anytime soon. Here is an indepth analysis of Coal India’s Stock.
INTRODUCTION TO COAL INDIA
FACTS AND FIGURES

 India is the 3rd largest producer and consumer of Coal in the World with 77% of India’s

power generation dependent on Coal.

 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. The Company has been growing production at 8-9% in the
last 2 years.

 CIL is responsible for ~82% of India’s Coal Production from its 471 Mines in 8 states.

 Coal powers 75 percent of India's electricity output, and annual demand is expected to

swell at 11 percent on rising power generation. The country, which faces a peak-hour
power deficit of nearly 14 percent, plans to triple its generation capacity over the next
decade.

 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. 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.

 It wants to expand overseas to bridge the yawning gap between India's demand

and supply, and is in talks for buying mining stakes in Australia, Indonesia and the
United States.

 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.
ADVANTAGES OF COAL INDIA
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.

Due to its low costs, CIL is capable of exporting its products if in the case that

Domestic Demand Declines.

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. Besides the other coal

consumption sectors like Steel and Cement are also growing at an equally fast

pace. India is already importing around 66 million tons of coal which is going to

increase rapidly.

 
 
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. Note India is

supposed to have 6.7% of the World’s Coal Reserves with geological resource of 277

Billion Tons. There is huge scope of growth since China at 3 Billion Tons produces almost

6 times as much coal as India does. However the Reserves would run out much faster

that is in less than 50 years at growth rates of around 8-10% per annum.

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.

The cost of production for CIL average just about $16/ton. This means that if CIL

sold Coal in the International Market it would earn a Gross Margin of almost 80%.
CHALLENGES OF COAL INDIA
Social problems are an obstacle to mine expansion with resistance from locals who are concerned

about displacement.

 Maoists, who say they are opposed to capitalism and have attacked some other state-run firms in

east India, are another hindrance to expansion.

 Bloated stocks of coal because of slow transportation have prompted top officials to consider

moving into power generation to use the inventories.

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.

 After selling shares, it will have to review its policy of discounting coal in order to strike a balance

between its social obligations -- to keep power cheap -- and keeping investors happy with profits and

dividends. ($1=44.55 rupees)

COAL INDIA IPO --INTRODUCTION
Coal India Ltd may sell as much as 151.5 billion rupees ($3.4 billion) of stock in the nation’s

biggest initial share sale as investors bet surging energy demand will override environmental

delays for new mines.

Fifteen of 18 investors surveyed by Bloomberg News said they plan to bid for shares in the

world’s largest coal producer. The stock of the state-owned company will be sold in a range

of 225 rupees to 245 rupees each, starting Oct. 18, with the proceeds helping the

government narrow its budget deficit.

 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. Coal India

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.

 
REASON FOR IPO IS 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. The sale of a 10 percent stake in

Coal India could help the government meet about 38 percent of the asset-sale target.

Indian companies have raised a record 806 billion rupees in equity and rights sales this

year, data compiled by Bloomberg show. The country’s benchmark Sensitive Index has

gained 15 percent so far in 2010, making it the best performing gauge among the world’s 10

largest stock markets.

Citigroup Inc., Deutsche Bank AG, Bank of America Corp., Enam Securities Pvt., Kotak

Mahindra Capital Co. and Morgan Stanley will manage Coal India’s offering.
 VALUATIONS
 The government is selling roughly 631.6 million shares, or 10 percent of the

company, in what is on track to be the largest IPO in Indian corporate history.

 The Overwhelming Opinion is that the Coal India IPO is cheaply valued and

should lead to immediate listing gains for investors. The P/E for CIL will be
around 16 times. Trailing P/E compared to 18-25x for comparable peers.

 China's Shenhua Energy, trading at 16x.

 Indonesian peer Adaro Energy trading at 20x.

 U.S. miner Peabody Energy trading at 25x.

 Retail investors and staff will get a further five percent discount on the final

price.
 HUGE MARKET :
 Coal powers 75 percent of India's electricity output, and annual demand is expected to

swell at 11 percent on rising power generation. The country, which faces a peak-hour
power deficit of nearly 14 percent, plans to triple its generation capacity over the next
decade.

 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.

 Expect 30% Return on Listing Day:

 Many experts and analysts believe that the offered price band of Coal India

IPO which is set at 225 to 245 Rs. per share is lower. Actual valuation might
take it to Rs. 265 to Rs. 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.
So short term IPO traders who want to

make a quick buck in the market can expect

some profits on the listing days.

For the long term investors also, the

situation is expected to be good.
 Good Points About This IPO
 5 out of 5 ratings from all three rating agencies - CARE,

ICRA and other

 Listed company direct entry into Nifty 50 and Sensex 30

indices

 Direct entry into the derivatives (futures & options) segment

 FII interest in Coal India IPO to disturb forex market

 Risk and Negatives with Highly Rated
Coal India IPO
Low Quality of Coal Reserves

Inefficient Mining Practices

Dangers of Being Government Owned

Growth Rate is not Fantastic by Any Means

Global Carbon Tax and Climate Change Legislation

 Summary
Despite the above Risks, Analyst 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, there are

risks. This does not mean that investors should be fearful of

every investment. It is by being aware of the risks, that
prudent risk management can be done which is essential to
successful investing.
ANALYSTS RECOMMENDATIONS

FOR
COAL INDIA IPO
 The power needs for the country are increasing day by day. Hence

Power companies are expected to benefit. Infrastructure

developments are on the rise with a stable government at the center.

 However, one needs to look at the valuations of the company and how

well it is placed with regard to the competitors.

 Being a government controlled Navratna Company; this is found to be

having strong fundamentals. The government is also expected to

offer the shares of coal India limited at 5% discount to retail
investors, hence they will benefit.
Majority of the market experts and analysts say that this IPO

should be subscribed to, and it is even being cited that due to this
IPO there might be a fall in the market.

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. Hence this IPO should be definitely subscribed to.

However, one must not go only with the recommendations.

Remember Reliance Power IPO and what happened to it on the day

of listing? 
Despite the Risks mentioned in presentation, Coal India is one of

the best quality stocks to come out in India’s Primary Markets.

However investors should be wary of the risks which will be

glossed over by the mainstream media and brokerages. As with

every investment however safe it might look, there are risks.

This does not mean that investors should be fearful of every

investment. It is by being aware of the risks, that prudent risk

management can be done which is essential to successful
investing.