Coal India may raise Rs17,700 cr in IPO

State-owned Coal India Ltd (CIL) filed its draft offer document on Monday to sell 631.6 million shares, or 10% of the company, in what is set to be India’s largest ever new share sale. It expects a valuation of 17-18 times its consolidated earnings per share (EPS) of Rs15.56 in fiscal 2010, according to at least three investment bankers, who did not want to be named.At the higher end of that valuation, the government can expect to raise some Rs17,689 crore. CIL, which has cash reserves of Rs39,077 crore, is not raising fresh capital.

“For Coal India, a price-earnings expectation of 17-18 is quite conservative,” said one of the bankers. Typically, the offer price in government asset divestments is decided by an empowered group of ministers in consultation with investment bankers.

CIL has estimated reserves of 64.78 billion tonnes, of which 52.54 billion tonnes are “proven” and 21.75 billion tonnes “extractable”, according to the prospectus filed with the markets regulator, making it owner of the biggest coal reserves in the world.In comparison, US-based Peabody Energy Corp., the largest private sector coal miner, has 9 billion tonnes of reserves. The US company is trading at 23.4 times its 2009 earnings.“Peabody produces better quality coal and, therefore, its market price is 23 times EPS,” said the investment banker cited above.

CIL is the sixth public sector unit share sale this year and could account for nearly 40% of the government’s disinvestment target of Rs40,000 crore this fiscal.

A successful share sale would beat the 2008 initial public offering (IPO) of Reliance Power Ltd, which mopped up Rs11,700 crore. Still, it will lag behind the $22.1 billion (Rs1.02 trillion today) raised by Agricultural Bank of China and $21.9 billion by its rival Industrial and Commercial Bank of China Ltd.

Equity analysts, however, are concerned about the low coal prices in India and cite government interference, though prices of the fuel were deregulated 10 years ago. An analyst at one of the so-called Big Four consulting firms pointed out that the average coal price in India had increased at an annual 4.9% for the last 10 years. The current price of Indian coal is $22-23 a tonne, whereas coal imported from Indonesia sells at $45-50 a tonne, a sharp contrast from a decade ago when the local product was more expensive.CIL’s chairman P.S. Bhattacharyya said this reflected the company’s competitiveness and the “potential to increase profitability”.

The price difference between CIL’s product and imports is largely because the local firm sells so-called unwashed coal, or fuel containing impurities. The company 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.

“In five years, the price of coal produced by CIL, too, would tend towards international prices,” Bhattacharyya said. “In five years, at least 50% of the coal we sell, or at least 300 million tonnes, would be sold at international prices.”

In the current fiscal, CIL’s EPS is expected to increase by at least Rs5, according to internal estimates. Going by its fiscal 2010 production of 431.26 mt of coal, the company will take at least 50 years to exhaust its “extractable” reserves.