Strong fundamentals, high investor interest and valuation estimates indicate good listing gains for the Coal India stock, say experts.
If market pundits are to be believed, the company’s stock could list at Rs 260-270 (12-15 per cent higher than the Rs 232.7 allotment price for retail investors) and could even shoot up to Rs 300 levels intra-day on Thursday. “It is possible for the stock to trade in that range, considering that the grey-market premium is already hovering around Rs 35-40 per share,” says Arun Kejriwal of Kejriwal Research and Investment.
The activity level at the counter is expected to remain high in the first couple of days at least, considering that many investors did not get the desired quantities while others will also want to book profits at higher levels. The possibility of Coal India being included in key domestic and a few India-related global indices should also keep institutional interest high in the stock.
We look at the different scenarios and what existing and new investors could do after the listing.
Fair value
Fundamentally, global mining companies are currently trading around seven times their estimated FY12 enterprise value to operating profit. At similar valuations, Coal India’s per share value works out to Rs 265-275. However, analysts suggest that considering the company’s size, operating margins and stable business model, its stock should attract premium valuations.
On the discounted cash flow method, too, which most analysts are using to value Coal India’s stock, its value per share works out to Rs 300-310, which is encouraging.
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There is, however, another set of analysts who think the company should be valued on the basis of valuations accorded to utilities, given that Coal India’s earnings are not cyclical like its global peers. By this parameter, wherein utilities are trading at about 16-18 times their FY12 estimated earnings, the fair value for Coal India works out even higher at Rs 325-360 per share.
Though analysts value the stock using different methods, on average the fair value of Coal India works out to around Rs 310 per share, which from the retail investors’ perspective (who have been allotted shares at Rs 232.75, considering 5 per cent discount) means over 33 per cent returns.
| TOPPING UP | ||||
| Price on listing day (Rs) | 260 | 280 | 300 | 320 |
| FY12 estimated PE (x) | 13.0 | 14.0 | 15.0 | 16.0 |
| Gain % (on Rs232) | 12.1 | 20.7 | 29.3 | 37.9 |
| Average price | 246 | 256 | 266 | 276 |
| Average price= Cost of shares allotted in IPO plus a similar quantity bought from the market on listing at a particular level | ||||
| GOOD UPSIDE | |
| Brokerage | Fair price (Rs) |
| Ambit Capital | 300 |
| CLSA | 309-324 |
| Edelweiss | 316 |
| Elara Capital | 265-275 |
| HDFC Securties | 305 |
| IIFL | 286-345 |
| JM Financial | 290 |
| Motilal Oswal | 325 |
| Average | 310 |
| Coal India’s per share valuation estimates Source: Analysts reports | |
Strategy
There is not even a single broker or research house we came across that did not have a buy rating on the company. Whatever may be the fair price of Coal India, retail investors should have no reasons to worry. In fact, considering Coal India’s solid business model and prospects in the industry, experts advise to hold on to the stock for the long term.
Investors will benefit as the company grows and its profitability improves in the years to come. Analysts expect the company to grow 15-18 per cent annually over the next five years, giving good returns along with reasonable dividend payouts.
“If one can hold and have a longer-term view, I think the stock could go as high as Rs 400 over the next 15 months,” says Ambareesh Baliga, VP, Karvy Stock Broking.
Should you book profit?
Though it is advisable to hold the stock for the long term, those who want to book profits, partially or wholly, can ride the tide on the day of listing. “If investors have a short-term view, probably they can book profits at Rs 280-290 levels, where the stock will be fully priced,” says Baliga. Beyond Rs 290-300, the stock will reflect a PE valuation of 18 times its FY11 and 15 times its FY12 estimated earnings, which is fairly valued (see table), limiting near-term upsides.
“One should not panic at the Rs 260-270 levels. But, I think partial profit booking is advisable beyond a price of Rs 290, as it will help investors bring down their cost of purchase,” says Kejriwal. For instance, if an investor sells half of its holding at Rs 290 per share and later manages to buy at Rs 270, the cost of purchase will come down to Rs 223 per share.
Fresh buying
On the other hand, there are many investors who have missed the bus. But, market pundits say investors should only consider fresh buying below the Rs 260-270 levels, which is where the valuations would remain reasonable and the risk would not be much.
For investors who did not get the desired quantities in the IPO, they could consider the stock even till the Rs 270-280 levels, because their average cost of shares would still remain low. To give an example, if an investor has been allotted 50 shares at Rs 232 each and wants to add another 50 shares at Rs 270 per share, the average cost will still be lower at about Rs 251 (see table), which is reasonable in the light of the valuations estimated by analysts.