The huge IPO is eagerly awaited, but factors such as pricing need careful attention.
Coal India’s Initial Public Offer (IPO), expected to open in the next few weeks, is a first in quite a few ways. To begin, not a single IPO has been given a rating of 5/5 by any rating agency; Coal India has earned this rating by Crisil. Indicating its fundamentals are strong or superior to any other listed company. The other first is that its IPO, in terms of value, will be the biggest ever in India. The earlier big IPO was of Reliance Power, worth about Rs 9,000 crore, which came out in January 2008. More important, with energy security at the top of the mind of many countries and companies, Coal India offers a unique play as a source of energy, given India’s growing need for the ‘black gold’. Experts say most institutional and retail investors will be eagerly waiting for the IPO.
The company will be hitting the market in mid-October and the government is planning to come out with an offer for sale of 10 per cent of its existing equity capital. Based on this, the IPO size will be in excess of Rs 12,500 crore, largest in the history of the Indian market. Post listing and based on the estimated price, its market value will be in excess of Rs 1,50,000 crore, making it the seventh largest listed company.
Pricing crucial
Considering the IPO size, the issue’s pricing is considered most important, determining its success. According to analyst estimates, it could be priced at Rs 200-220 per share. “I think the IPO pricing would be attractive in the range of Rs 200 per share; additionally, the five per cent discount for retail investors will act as additional incentive,” says Arun Kejriwal, who heads Kejriwal Research and Investment Services.
Experts believe the pricing needs to be made attractive. “Any issue of above Rs 10,000 crore in size is difficult to market. But if the pricing is attractive, even large issues like Coal India can get through. Coal India’s IPO is going to be very exciting, considering its position in the coal industry and huge reserves,” says financial expert S P Tulsian.
Based on different methods which peg the valuation in the range of Rs 234-344 per share, if the issue is priced in around Rs 200 per share, 13 times its 2009-10 earnings, it will provide a good opportunity for investors.
| PEER COMPARISON | ||
| EV/Ebitda | P/E (x) | |
| Global peers* | 11.3 | 17 |
| Coal India | ||
| Market value* (Rs cr) | 1,47,761 | 1,67,100 |
| Per share value (Rs ) | 234 | 265 |
| Per share (DCF) (Rs ) | 286 | 345 |
| Expected IPO price (Rs ) | 200 | 220 |
| Issue size (mn share) | 631.6 | 631.6 |
| Issue size (Rs Cr) | 12,632 | 13,895 |
| *Note: Coal India value is based on global peer multiples applied on Coal India’s FY10 financials | ||
| STEADY RISE | |||
| FY10 | FY11E | FY12E | |
| Offtake (mn tonne) | 415.2 | 460.4 | 477.1 |
| Price (Rs / tonne) | 1,070 | 1,101 | 1,158 |
| Revenues (Rs cr) | 47,723 | 53,234 | 58,515 |
| Ebitda Margin (%) | 27.4 | 29 | 27.7 |
| PAT (Rs crore) | 9,829 | 11,222 | 11,775 |
| Recurring EPS (Rs ) | 15.6 | 17.8 | 18.6 |
| RoE (%) | 43.8 | 37.5 | 30.9 |
| Source: IIFL research report | |||
Enviable business
The company is the world’s largest coal minining company and has 81 per cent market share in India. Importantly, it has the world’s largest proven coal reserves, of 52,500 million tonnes, accounting for almost 48 per cent of India’s total reserves. Given its estimated annual production of 460 mt for 2010-11, there is production visibility for 114 years (assuming output at these levels).
On the back of its positioning, the company generates huge annual cash flow. As of March, it was sitting on cash and bank balances of Rs 39,000 crore. Crisil believes this, the strong cash generation and very low debt 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.
A majority of its coal is sold at notified prices, significantly lower (almost 60 per cent) compared to international benchmark prices. Despite this, the company has 27 per cent operating margins, which can be attributed to low cost of production. Notably, return ratios such as return on equity, which is 38 per cent, is not only respectable but superior compared to its peers in the industry.
Besides its unique business fundamentals, the attractiveness of the coal industry equally ranks high for the IPO’s success. Coal as a fuel is required in most industries and India is still an importer. According to IIFL estimates, coal shortfall is set to widen from 65 mt in 2009-10 to 155 mt by 2012-13 and further to 277 mt by 2016-17. This will be led by India’s coal demand growth at 10 per cent annually over FY 2011-17, as 108 Gw of coal-fired power generation capacity becomes operational.
