Coal India’s Initial Public Offering (IPO), opening on 18th October 2010, merits attention because the stock has all the qualities required for an investment-grade stock. (See Coal India IPO: Best PSU Stock For Investment for details of Coal India‘s financials, PE & Return on Net Worth (RONW)).
The best thing about the Coal India IPO is the pricing of the shares. The Government has announced that the price band for the offer of shares of Coal India will be Rs. 225-245 per share.
Coal India is offering a discount of 5% for retail investors which means that the price band will be Rs. 214 to 233.
At the FY 2010 consolidated & diluted PE of Rs. 15.56, Coal India’s PE (after retail discount) works out to 15 at the higher end of the price band.
However, it must be borne in mind that Coal India has cash & bank balances of Rs. 39,077 crores in its balance sheet as of 31st March 2010. Coal India’s total equity capital is 631.60 crores shares. That means the cash & bank balance per share is Rs. 62. If this is deducted from the price paid, one is only paying Rs. 171 per share of Coal India resulting in a PE of only 11 at the higher end of the price band.
This is quite reasonable given that Coal India has a Return on Net Worth (RONW) of 38% in FY 2009-10 and a 3 year weighted average of 30%.
The other important aspect of Coal India is that it is presently selling its coal at about $22-23 per tonne while coal imported from Indonesia sells at $45-50 a tonne. The reason for the steep price differential is because Coal India sells “unwashed coal” or coal containing impurities. Coal India has stated that it is setting up 20 washeries and has decided that all new coal mines producing at least 2.5 million tonnes (mt) a year will have captive washeries.
The result of this exercise is that in five years, the price of coal produced by Coal India will be comparable to the price that customers are willing to pay for imported coal. Coal India’s management stated that in five years at least 50% of the coal sold by Coal India equal to approximately 300 million tonnes would be sold at international prices.
This augurs very well for the investors of Coal India. In the current fiscal, Coal India’s EPS is expected to increase by at least Rs 5 according to the management of Coal India. It was stated that over the next three years, Coal India could be expected to register a substantial expansion in operating margins from 22% in FY10 to 30% in FY13 led by improved labour efficiency, focus on beneficiated coal and technology upgrades.
Coal India’s IPO pricing is also competitive in comparison to the overseas players as can be seen from the attached image. So, Coal India has all the attributes to be a core part of an investor’s stock portfolio. (See also Coal India IPO: Best PSU Stock For Investment).