Rakesh Jhunjhunwala, India’s billionaire investor, has always been very bullish on PSU stocks. Rakesh Jhunjhunwala always reminces with fondness his purchases of PSU stocks like Shipping Corporation of India, Bharat Earth Movers Ltd (BEML) and Bharat Electronics, each of which has become a multi-bagger in Rakesh Jhunjhunwala‘s stock portfolio and contributed to Rakesh Jhunjhunwala becoming a billionaire.
Rakesh Jhunjhunwala recalls that when he was buying heavily into the shares of PSU companies in the heady days of the 1990s, he was mocked by his peers who thought Rakesh Jhunjhunwala was making a mistake on the ground that PSU scrips would never catch the fancy of the FIIs and soar to astronomical heights. However, Rakesh Jhunjhunwala used his common sense and reasoned that “if the girl is beautiful, there will always be suitors for her“. Rakesh Jhunjhunwala‘s prophecy proved correct and each one of Rakesh Jhunjhunwala‘s PSU stock picks which were languishing turned into multi-baggers as soon as the FIIs discovered that these shares offered predictable cash flows, good dividend yield and were available at cheap valuations. (See Rakesh Jhunjhunwala’s stock portfolio and best buys)
Ramesh Damani, the Nawab of Dalal Street, who is also well known for his astute stock picks, makes his recommendation for PSU stocks quite well known. PSU stocks meet all of the criteria that a value investor like Ramesh Damani is looking for. They have a good business model with competent management, low debt, high return on equity and offer a huge margin of safety. Ramesh Damani emphasis that one must make sure that the downside is protected. From that perspective, Ramesh Damani is very happy with PSU stocks because they are quoting at low PE ratios compared to their private sector peers. So, says Ramesh Damani, while the downside is limited, the upside is unlimited. A win-win situation for an investor says Ramesh Damani, the master stock picker. (See Ramesh Damani’s Stock Picks)
If more proof is required that the doyens of the stock market prefer PSU stocks, the same is provided by Ramdeo Agarwal, the millionaire founder-partner of Motilal Oswal Financial Services Ltd. One of Ramdeo Agarwal‘s all-time favourite stock picks has been State Bank of India, the behemoth of the banking industry with a market capitalisation of over Rs. 206,000 crores. Ramdeo Agarwal recalls that State Bank of India attracted him because it was available at ridiculously low valuations and offered a high dividend yield. Ramdeo Agarwal bought heavily into the shares of State Bank of India and patiently waited and he had his multi-bagger.
Ramdeo Agarwal recently went public with his latest stock pick – yet another PSU – Central Bank of India. Central Bank of India is a laggard at the moment but is on a steady but slow growth path. (See Central Bank of India: Choice Of Two Master Stock-Pickers)
Coal India fully meets the requirement that the three doyens of the Indian stock market, Rakesh Jhunjhunwala, Ramesh Damani & Ramdeo Agarwal, have laid out. A “monoploy” business, unending demand for the product, excellent management, excellent financial position, good dividend payout and yield and reasonable valuations.
Coal India, a “Navratna” PSU, is the largest coal producing company in the World based on its raw coal production of 431.26 million tons in fiscal 2010. Coal India is also the largest coal reserve holder in the world based on its reserve base as of April 1, 2010. India is the world’s third largest producer and consumer of coal and the coal produced by Coal India accounted for approximately 81.9% of coal production in India in fiscal 2009.
Coal India‘s Initial Public Offering (IPO) will open for subscription on October 18, 2010. Coal India is offering 63.16 crore equity shares through the issue, which is an offer for sale by the President of India, acting through the ministry of coal, Government of India. This will be 10% of Coal India‘s paid-up equity. The Coal India IPO will be India’s LARGEST IPO. At the higher end of the price band (about 17-18 times of the FY 2010 consolidated EPS of Rs. 15.56), the Coal India IPO will raise Rs. 17,689 crores. In contrast, the Reliance Power IPO raised Rs. 11,700 crores. Of course, the record for the World’s Largest IPO is still held by the $22.1 billion (Rs1.02 trillion today) raised by Agricultural Bank of China and $21.9 billion by Industrial and Commercial Bank of China Ltd.
Coal India has a strong financial background. Coal India‘s total income increased from Rs.340,087.99 million in fiscal 2006 to Rs.525,922.92 million in fiscal 2010, while Coal India‘s profit after tax, as restated, increased from Rs.61,136.01 million in fiscal 2006 to Rs.98,294.09 million in fiscal 2010. As of March 31, 2010, Coal India‘s had reserves and surplus of Rs.195,289.14 million, and Coal India‘s net worth was Rs.258,437.43 million. As of March 31, 2010, Coal India‘s cash and bank balances were Rs.390,777.60 million while total indebtedness was Rs.20,868.51 million.
Coal India‘s Competitive Strengths
• The largest coal producer and one of the largest reserve holders of coal in the world
• Well positioned to capitalize on the high demand for coal in India
• Track record of growth and cost efficient operations
• Strong track record of financial performance
• Strong capabilities for exploration, mine planning, research and development
• Experienced senior management team and large pool of skilled employees
Coal India’s Business Strategies
• Continue to increase production and capitalize on the significant demand-supply gap for coal in India
• Improve realizations through increased sales of beneficiated coal and higher quality coal, and the use of
E-Auction pricing mechanisms
• Enhance our profitability and maintain our competitiveness by improving operating and cost efficiencies
• Continue to increase our reserve base in India
• Acquire strategic international resources or mining rights and identify joint development opportunities
• Continue to focus on developing environmentally and socially sustainable operations
Coal India is expected to be priced at a valuation of 17-18 times its consolidated earnings per share (EPS) of Rs15.56 in fiscal 2010 which is not at all unreasonable for a company with a monopoly product and a ROE of 38%. Coal India has cash reserves of Rs. 39,077 crores. If this is deducted from the price, one is only paying about 10 times the PE of FY 2010 which is a bargain.
In comparison, US-based Peabody Energy Corp., the largest private sector coal miner in the USA is trading at 23.4 times its 2009 earnings.
Coal India has been given a rating of 5/5 by Crisil and ICRA indicating strong fundamentals.
Other recent IPOs of PSUs have richly rewarded investors. Oil India‘s IPO in September 2009 was priced at Rs. 1050 and it is quoting at Rs. 1489, up a handsome 41%. Shares of Power Finance Corporation was issued at Rs. 85.00 and it is presently quoting at Rs. 363.45, up a phenomenal 327.59%. Similarly, shares of Rural Electrification Corporation were issued at Rs. 105.00 and are presently quoting at Rs. 385.45, up a whopping 267.10%. Of course, shares of SJVN and NHPC are notable exceptions which have not fired yet.