The wait for Coal India’s initial public offer (IPO) pricing is finally over, with the government announcing a price band of Rs 225-245, which values the company at Rs 1,54,752 crore at the upper price band. However, the pricing has come as a surprise, and the Street seems divided on this.
While the pricing is slightly higher than what most analysts had projected earlier, a few had also pegged the company’s value at Rs 234-344 per share, based on different valuation methods.
Last month, most experts and analysts had estimated the IPO to be priced in the range of Rs 200-220. Even after considering that the market (Sensex) has risen 4 per cent since then, the final pricing at Rs 225-245 appears to be higher. At this pricing, the stock’s PE works out to 14.4-15.7 times the company’s 2009-10 consolidated earnings.
“The issue is aggressively priced. It would have helped in attracting retail investors if the price had been in the region of Rs 200 a share,” said Mayank Shah, chief executive officer at Anagram Capital.
While Coal India’s prospects and fundamentals are good, experts suggest that given the somewhat aggressive pricing, the retail portion of the IPO could now get oversubscribed by a little over one time. They argue that had the pricing been as expected earlier, the IPO could have seen higher retail interest.
“Nevertheless, investors can still expect 10-15 per cent returns in the next one year,” Shah added. A benign IPO pricing would have left something for the investors in the near term as well.
Meanwhile, Coal India’s IPO has many firsts to its credit. For instance, it is the first one to be accorded a rating of 5/5 by rating agencies, which indicates superior fundamentals compared to any other listed company. The other first is that its IPO, in terms of value, will be the biggest ever India has ever witnessed. The offer, which is opening on October 18, will help the government garner Rs 15,475 crore at the upper price band. This is about 70 per cent higher that Reliance Power’s IPO in January 2008, which raised about Rs 9,000 crore from the primary market.
Pricing apart, 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. It has the world’s largest proven coal reserves of 52,500 million tonnes (mt), accounting for almost 48 per cent of India’s total reserves. Its annual production is estimated at 460 mt for 2010-11. Assuming constant production at these levels, the company’s reserves would last for over 100 years.
Its huge cash and bank balance of Rs 39,000 crore as on March 2010, as well as robust cash flows, would enable the company to pursue growth opportunities globally and also comfortably fund its capital expenditure plans of Rs 8,450 crore over the next two years, believes Crisil, a leading rating agency.
While a majority of the company’s coal is sold at notified prices (almost 60 per cent lower, compared to international benchmark prices), any move towards market-based pricing would provide further triggers. Nevertheless, the company makes a healthy 27 per cent operating margin, aided by its low cost of production.
