Tuesday, October 19, 2010

Coal India IPO

Coal India, the world’s largest Coal producing company is giving out its IPO. This is something that has created a furor in the Indian stock market and people are scrambling to mobilize funds to subscribe to this IPO.

Let us take a look at the vitals of this IPO before we proceed with our analysis:

Issue Price: Rs. 225-245
Lot size: 25 shares and multiples of 25 thereafter
Minimum Bid: 25 shares
Minimum Investment Amount: Rs. 5625/-

Issue Opens: 18 Oct 2010
Issue Closes: 21 Oct 2010

Listing On: BSE and NSE (Expected in the 1st week of November)

Shares available for public to buy: 5684.73 lakh shares

Max shares available for a Retail investor: 425 – 400 (depending on the price)

Lead Manager: Citigroup global markets India Pvt Ltd.
Registrar: Link Intime India Pvt Ltd
Issue Size: 14,211 Crores (@ the base price of Rs. 225 per share)


Yes you read it right; the amount that is going to be raised is INR 14,211 Crores. This is going to be the biggest IPO ever in the history of the Indian stock market. No wonder it has created a lot of news and media attention. Let us look at this offering in more detail.

What does the company Coal India do?

Coal India is the world’s largest coal mining company which is fully owned by the government of India. It operates 471 mines across 8 states in India. It is also the largest coal reserves holder in the world.

Coal is the largest contributor to the power generation plants of India for generation of electricity. Being the single largest miner, the company generated a turnover of more than Rs. 50,000 Crores last financial year and posted a profit of over Rs. 9000 Crores.

Why the IPO?

The objective of the IPO is to carry out the divestment of 631,636,440 equity shares by the selling shareholder - government of India. This IPO is a part of the government's divestment programme and the entire amount will go to government, which will hold 89.99% stake post dilution.

We can expect divestment of many such government of India owned enterprises in the forthcoming months.

Should we Subscribe to Coal India IPO?

By now, you are murmuring, just tell me should I subscribe to this IPO or should I not. Well my dear reader, it is not so simple. The answer is – it depends on you. Read on to find out more.

Is the Pricing Appropriate?

The promoters of the issue have come up with a very attractive pricing. The project Earnings Per Share (EPS) of CIL Ltd is Rs. 15/- for the FY 10. Even at the lower price band of Rs. 225 per share, the issue is at 15 times the PE multiple which is very sensible. But at the same time, another point to be considered is the fact that, global players in the same field are all running at 11 to 13 times their PE multiple which may make some people feel that the pricing is a little bit on the costlier or expensive side.

Given the fact that, this is a fully owned by Government of India company, that is sitting on gigantic coal reserves and is posting solid profits and turnovers, a 15 times PE multiple is not such an expensive bargain.

Verdict: Of course Yes. The price is appropriate and for that matter very attractive.

Icing on the Cake: CIL Ltd has offered an extra 5% discount to retail investors (you and me) who subscribe to the issue. This discount is applicable only to retail investors and all others (Institutional, Mutual Funds, High Net worth Individuals, Foreign buyers etc) have to pay the full issue price whereas we get a 5% discount.

Simply put: If the issue price is decided as Rs. 230/- per share we (retail investors) will be able to buy it at 218.50/- whereas the other category of investors have to pay the full Rs. 230/- per share.

Tip: A Retail Investor is someone who is an individual who is trading on his own behalf using his earnings/money. Also, a retail investor cannot subscribe for an IPO with a value of more than Rs. 1 lac.

Will this be a repeat of Reliance Power?

We all know what happened to Reliance Power. Don’t we? It is still fresh in my memories. Reliance Power came up with the largest IPO on date with a value of over Rs. 11,000/- Crores. It was the most oversubscribed IPO that people had ever seen. It was offered at a price band of Rs. 405-450 per share and rumors were afloat that the company would be touching a price of Rs. 700/- on the listing day.

There were a majority of people who were extremely positive about the IPO and wanted to make a fast buck with the offering and there were a small minority like me who were skeptical about the issue. Let me tell you why.

1. The IPO was significantly overpriced. NTPC the nation’s largest power producer was trading at around Rs. 200/- per share. Reliance Power was planning to produce as much power as NTPC 3 years down the lane and was still quoting a price which was twice as much as NTPC.
2. You know that a shares price is determined by the demand-supply theory. More buyers for a share means – price goes up. More sellers for a share means – price goes down.
3. Everyone wanted to sell on the day of listing at Rs. 700/- or more per share.

A Grave contradiction to point no.2. Everyone was subscribing to the IPO with the idea of selling the shares on the day of listing at more than 50% profit. Simple logic tells us that, if everyone is going to sell and there are not enough buyers, the price of the stock falls. And that is exactly what happened.

The share is currently trading at around Rs. 160/- per share after going to below Rs. 100/- per share during the recession period.

Verdict: Maybe.

Reason supporting the Repeat: This time again, people are expecting solid listing gains and are expecting to make profits out of the same.

Reason against the Repeat: This is a government of India Company that is very large and profitable. Most importantly it is not gravely overpriced so the issue may not end up like reliance power.

Should you Subscribe to the IPO?

Verdict: It Depends.

If you are planning on listing gains or a quick buck – I would be a bit skeptical because if a repeat of the Reliance Power fiasco happens, you may end up burning your fingers.

If you are planning on a solid long term investment – Then you can definitely subscribe to the issue because:
1. It is a government of India owned company
2. It posts solid profits and turnover every year
3. It is sitting on the worlds largest coal reserves
4. The chances of price appreciation in the forthcoming months are very high. Even if the shares takes a small plunge due to listing day sells, it is sure to bounce back and give good returns to investors.

Happy Investing!!!

Disclaimer: All the contents in the above mentioned article are my personal thoughts and they are not recommendations to buy or subscribe to this IPO. The reader is requested to think on his own accord before taking the decision to subscribe to the IPO and the author cannot be held responsible for any losses arising out of the same.

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