It is a known fact that the Primary market exuberance feeds on secondary market sentiment. And, the prevailing positive rub-off from secondary markets can be clearly sensed from the way the corporate India is hitting markets with their public issues to latch-on to the momentum in the liquidity wave.
Moreover, when the system is aflush with ample liquidity, a giant-sized IPO can put to test the integrity of the markets and the prevailing market sentiment. In such a scenario, the world’s largest coal producer, Coal India Ltd, plans to raise around $3.4 billion (Rs.15,000 crore) through IPO by offering 631.6 million equity shares by the government. The mega-issue will open on October 18 and will close on October 21.
Thus, the offering of the Navratna public sector company – which accounts for about 82% of the coal output of the country – will be India’s biggest ever IPO till date. Further, when an IPO of such huge magnitude hits the market, the secondary market remains sub-dued under the fear that investors will liquidate shares to subscribe to the mega-sized public offering.
The Coal India IPO could go a long way in determining the success of the Indian government’s efforts to raise billions of dollars through disinvestment this fiscal year. Last few PSU follow-on offerings (NMDC and NTPC) of 2010 were met with cold response, especially from the retail investors, on account of being over priced – and had to be bailed out by big-daddy LIC.
Coming back to Coal India IPO, the government has fixed the price band of Rs.225-245 through a 100% book building process. Analysts are expecting Coal India – which is the best bet on India’s rising coal deficit scenario – to report EPS at 15% CAGR over FY10-13. As per the observers of the IPO market, the stock could list positively with 15-20% premium, valuing the stock at 15-16 times the company’s FY11 earnings, which is cheaper than some of the listed companies in the power utility sector.
Further, the government has indicated that domestic coal prices could see an increase if profit-sharing arrangements in the proposed Mines and Minerals Development and Regulation Act were implemented.
In my opinion, Coal India deserves to trade at a premium to global coal peers with a price target anywhere between Rs.300 to Rs.325 on listing. The coal-major has substantial headroom to increase prices in coming years and will provide a linear earnings trajectory and impressive returns on the capital employed.
P.S.: Coal India will offer 5% discount on the final IPO price to the retail investors and employees of the company and its subsidiaries. So, it looks like a safe bet !