Coal India Offer for Sale (OFS) – January 2015

by Shiv Kukreja on January 30, 2015

in IPO/NFO

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

The government is currently struggling to meet its fiscal deficit target of 4.1%. Finance Minister Arun Jaitley, in his budget speech last year, had accepted this target as a challenge. He then set a target to divest Rs. 43,425 crore worth of stake in public sector undertakings (PSUs). To meet its target of divestment proceeds this fiscal year, the government has scheduled an offer for sale (OFS) for Coal India on the stock exchanges today.

The government has decided to offload its 10% stake in the company i.e. offering 63.16 crore shares. At Rs. 358 a share as the floor price and a 5% discount for the retail investors, the government will be able to raise a minimum of Rs. 22,386 crore from this share sale. Currently, the government holds about 89.65% stake in the company.

Before we consider the factors to decide whether we should invest in this OFS or not, let us first check the basic details of this offer.

Shares on Sale – The government has decided to offload 10% stake in Coal India and will place 63,16,36,440 shares in the offer for sale, out of which 20% shares i.e. 12,63,27,288 shares have been reserved for the retail investors investing up to Rs. 2 lakh.

Offer Price – Share price of Coal India closed at Rs. 374.95 on the NSE yesterday. The government has fixed Rs. 358 as the floor price in the OFS, which is a discount of 4.52% to its closing price. The floor price of Rs. 358 was disclosed by the government after market hours yesterday. So, the market will react to this price in the trading hours today.

5% Discount for the Retail Investors – The government has decided to offer a discount of 5% to the retail investors. This discount will be offered on the price at which the retail investors bid in the OFS or the cut-off price set by the government, whichever is higher.

Brokerage – Unlike IPOs, stock brokers levy brokerage charges on these OFS transactions. These charges are normally higher than the rate of brokerage investors pay on their routine transactions. So, if the allotment price is fixed at say Rs. 360, the retail investors will get it at Rs. 342 a share plus applicable brokerage charges and taxes thereon. So, the retail investors should consider these charges in their overall cost of acquisition.

Introduction of Cut-Off price option for retail investors again deferred – Offer for sale (OFS) process is still very complicated for the retail investors. They either require proper guidance or the option to bid at the cut-off price. But, despite of considering it every time a big OFS comes, it has never been introduced so far. I fail to understand the reason for such a delay in introducing the cut-off price option for the retail investors. I think SEBI should introduce it as soon as possible.

Time Period – Coal India OFS will remain open for a single day only and that too, during the trading hours of the stock exchanges i.e. between 9:15 a.m. and 3:30 p.m. You’ll get to know the status of your bids by 6 p.m. and if successful, you’ll get the shares allotted by the designated stock exchange on T+1 basis.

Once bidding starts, you can check the bidding status on the National Stock Exchange as well as on the Bombay Stock Exchange.

How does an OFS process work?

If you are investing in an OFS for the first time and want to know more about the process, here is the link to check the details about it. If you have any query regarding the process, please share it here, I’ll try to respond to it as soon as possible.

How to invest?

You need to contact your broker to know how it is facilitating the bidding process. I think most of the broking firms must be providing the investment facility through their online platforms. If you don’t have access to the online platform, you should contact the customer care department of your broker and get the bid placed through telephonic confirmation.

Should you invest in Coal India OFS?

Diesel prices form a substantial part of Coal India’s overall cost of production. As a result of sharply falling crude prices, the government has lowered diesel prices a few times in the last 3-4 months and lower diesel prices augur well for the profitability of Coal India. Moreover, the company is expected to have higher realisations in the coming years, which could again boost its profitability.

The government’s focus on doubling its coal production to a billion tonnes by FY20 and also building of three key railway lines in Odisha, Chhattisgarh and Jharkhand by 2017 should also help in improving operational efficiency for the company. Upcoming auction of the coal blocks should also result in higher prices and thereby boosting its profitability.

Say, the government fixes Coal India’s allotment price at Rs. 365 a share and the retail investors get it allotted at a discount of 5% i.e. at Rs. 346.75 a share. So, with Rs. 346.75 as our cost of acquisition per share and an expected EPS of Rs. 25 for FY15, we are buying Coal India shares at 14X its estimated EPS for the current financial year.

If I expect a modest EPS growth of 15% for the next two financial years, its stock trades at 12.1 times FY16 estimated EPS and 10.5 times FY17 estimated EPS. From valuations point of view, I think the stock is attractively valued.

But, the problem lies somewhere else. I think the way all these PSUs get managed, it is highly unprofessional. I think Indian PSUs, including Coal India, are marred by labour problems, operational inefficiencies and poor decision making at the top. The company has not been able to meet its production targets year after year and there is nobody who is ready to take responsibility for the same. There are several sectors, including power and infrastructure, which have suffered a lot due to shortage of coal as a result of low coal production and high import cost.

But, I think there is still some hope left and we should give Coal India and the new government some time to act in the right direction. I think the government is committed enough to act swiftly whenever it faces some kind of headwinds. The recent settlement with the Coal India labour union and then immediately coming out with this OFS is a perfect example of government’s efficiency in this regards.

I think the offer price has been attractively fixed at Rs. 358 a share and a 5% discount to this price leaves a reasonable margin of safety for the retail investors. With the government taking it in the right direction, I expect its stock price to move past Rs. 400 levels very soon.

{ 67 comments… read them below or add one }

Ravichandra January 30, 2015 at 2:11 AM

what is expected allotment price for Coal India OFS? I mean at what price should I bid to ensure I get allotted. I am ok to bid upto Rs365

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Shiv Kukreja January 30, 2015 at 2:19 AM

Hi Ravi,
It is very difficult to guesstimate the allotment price in the Coal India OFS. I think you should follow its indicative price closely and then take a decision what price you should bid at.

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Sushant January 30, 2015 at 9:40 AM

In icicidirect I see option to bid at cutoff price. 🙂
shouldn’t it be best way to bit?

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Shiv Kukreja January 30, 2015 at 9:49 AM

“Cut-Off” option is there with Edelweiss as well, but it is grayed out. If you are able to use it, then indeed it is the best way to bid.

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Shashwat January 30, 2015 at 11:17 AM

Suppose I bid at 360, so 5% discount will be calculated on 360?

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Shiv Kukreja January 30, 2015 at 11:47 AM

Yes, you’ll get discount on Rs. 360, but only if you are allotted its shares. If the allotment price is fixed at Rs. 362, then you’ll not get the shares.

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Kartavi January 30, 2015 at 12:02 PM

If I apply at 365 and cut off price is declared at 360. What will be the effect to me ?

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Shiv Kukreja January 30, 2015 at 12:03 PM

You’ll get shares allotted at Rs. 365 – 5% discount i.e. 346.75. But, then you’ll get shares allotted for sure.

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George January 30, 2015 at 1:30 PM

Hi,
Considering that the subscription is still below 25% and for retails 12% of the reserved portion. Don’t you think that the allotted price will be at at floor price 358.

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Shiv Kukreja January 30, 2015 at 1:54 PM

Hi George,
You are right, one should not bid at a higher price. Though its indicative price is still Rs. 360.11, but in case of undersubscription, everybody will get full allotment.

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Sagar Diwan January 30, 2015 at 2:08 PM
Shiv Kukreja January 30, 2015 at 2:13 PM

Yes, it is expectedly low as the issue size is big and 20% of the issue size is reserved for them. I think it should close at around 50%.

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Sagar Diwan January 30, 2015 at 2:28 PM

Yes, this means retail investors will get the allotment for sure.

However, even the non-retail subscription is roughly 40%. If the overall subscription remains fairly low and the targets are not met, could there be any follow up issue ? If so, it would be at an even lower price I guess.

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Shiv Kukreja January 30, 2015 at 2:30 PM

I think non-retail portion will get oversubscribed and I don’t think there will be any follow up issue for Coal India.

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pradeep January 30, 2015 at 3:01 PM

Well i bid for floor price 359 but current price is showing 361. Will i get any allotment if final price at stock market is above 359 at 3.30 pm?

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Shiv Kukreja January 30, 2015 at 3:03 PM

If it remains undersubscribed, then you’ll get full allotment.

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pradeep January 30, 2015 at 4:17 PM

coal india subscribed 1.04 times. Retial is around 45% as per hindu businessline.

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Nawraj January 30, 2015 at 3:50 PM

I appliewd for 300 shares at 358/- .
Shall I get the allotment..

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Shiv Kukreja January 30, 2015 at 3:54 PM

You should get the allotment.

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shashwat January 30, 2015 at 7:17 PM

Some confusion regarding green shoe option. Subscription numbers were for 5% shareholding or 10%. 63.16 crore is 10% or 5% of total shares?

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Shiv Kukreja January 30, 2015 at 7:35 PM

63.16 crore shares is 10% of its total shares i.e. including the green-shoe option.

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shashwat January 30, 2015 at 7:51 PM

Thanks Shiv for all your responses on tax free bonds, cpse etf and now on OFS. I have applied 50 shares at 358.

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Shiv Kukreja January 30, 2015 at 11:30 PM

You are most welcome Shashwat!

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Nitin January 30, 2015 at 9:51 PM

I applied for shares at 360. You have used the term allotment price. Would that be 358 since it is under subscribed? I understand that I would get full allotment, curious to know the price per share I would get .

Thanks!

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Shiv Kukreja January 30, 2015 at 11:29 PM

Hi Nitin,
You’ll be allotted shares at Rs. 360 – 5% discount i.e. Rs. 342.

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Shiv Kukreja January 31, 2015 at 12:19 AM

Coal India OFS got subscribed 106.90%. In the retail category, it got subscribed 44.05%. Its Clearing Price has been fixed at Rs. 358 for the Retail Investors as well as the Non-Retail Investors. All valid retail applications will get full allotment and 5% discount.

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Shiv Kukreja January 31, 2015 at 10:57 AM

Allotment has been made. I’ve been allotted shares at Rs. 340.10 (Rs. 358 – 5% discount) + Brokerage + Service Tax + STT.

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AB January 31, 2015 at 11:42 AM

Hi Shiv,
I bid at 361 for 540 shares – but the contract note does not show the discounted price. Request you to let me know whom can I take this up with.
Thanks

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Shiv Kukreja January 31, 2015 at 1:26 PM

Hi AB,
You should contact your broker for the same. Also, check the category you had selected. It should be the retail category, otherwise you won’t get the discount.

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pradeep January 31, 2015 at 3:43 PM

I have still not got allotment details. I had applied through hdfc securities.

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Shiv Kukreja January 31, 2015 at 5:13 PM

Check your mail, you must have got a contract note from HDFC Securities. If not, wait till Monday at least.

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Sanjay Shah February 1, 2015 at 11:38 AM

You cannot bid on Coal India OFS via HDFC Securities website. It has to be done only through phone and branch. You will get contract note by physical mail for OFS done through HDFC.

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pradeep February 1, 2015 at 7:56 PM

Yes you are right sanjay. You cannot bid OFS in HDFC via online site. I had called them and placed the order over phone. I have still not received the contract notes but have recd. refund of 5 % discount for the applied share minus the brokerage shares in my bank a/c. I am assuming shares are alloted to me. 🙂

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Sanjay Shah February 1, 2015 at 11:11 PM

That’s great Pradeep! I am waiting for the 5% discount 🙂

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Pritesh Gandhi January 31, 2015 at 11:57 AM

Hi,
If I have existing share of coal India with price of 365.

OFS declared with 358 rs with 5% discount.

I want to just know what’s the benefit of existing buyer ?

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Shiv Kukreja January 31, 2015 at 1:30 PM

Hi,
5% discount was available for the investors participating in this OFS. Existing investors do not get any special benefit.

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Jalpesh Patel January 31, 2015 at 5:14 PM

Hi Shiv,
I think Coal prices have fallen a lot in the international markets in 2014 just like crude prices.

I guess Coal India is NOT affected by this steep fall in international prices of coal because it sells most of its output in domestic market at regulated prices which are well below international prices even now in 2014-15.
The situation here for Coal India is similar to ONGC selling crude to IOC/HP at subsidized prices.

I guess the deregulation of prices at which they (Coal India / ONGC) sell their output leaves a very high scope of a potential upside in Coal India & ONGC both. BUT, the situation is exactly opposite for NMDC which sells Iron ore in domestic market at prices which are much HIGHER than international iron ore prices.

If customs duty and other landing chargs on Iron ore imports are reduced then NMDC will nosedive.

Pls do share your views on these lines for Coal India, ONGC and NMDC as all THREE are disinvestment candidates and OFS is expected shortly for ONGC / NMDC.

Thanks,
Jalpesh Patel

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Shiv Kukreja January 31, 2015 at 5:24 PM

Hi Jalpesh,
I completely agree with you on this. There is a lot of scope of improvement will all these PSUs. I think Modi government should privatize 80% of these PSUs except some sensitive sectors in which private participation is not in the nation’s interest. Or, they should adopt the Gujarat model by making them highly efficient.

Also, the government must ensure there is enough competition among private sector players so that they do not exploit consumers with their monopolistic situation.

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Jalpesh Patel February 2, 2015 at 11:45 AM

Thanks Shiv for your views.

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Shiv Kukreja February 2, 2015 at 11:51 AM

You are welcome!

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sundararajan February 1, 2015 at 7:11 PM

On a different subject, I read IOB tier -1 bonds. Do you know about this? Can retail investor buy this? If yes, how can one buy? Can you let me know? Thanks

Indian Overseas Bank has said it has planned to raise up to Rs.1,000 crore through a bond issue to augment additional Tier-I capital and overall capital of the Bank. It has launched an issue of unsecured, non-convertible, additional Tier – I, Basel III Compliant Perpetual Bonds to the extent of Rs.1,000 crore including a green shoe option of Rs.300 crore. The Bond will have a face value of Rs.10 lakh and carry a coupon rate of 10 per cent payable annually.

The Bond issue was opened on January 23 for subscription and would close on February 4, according to a statement.

Reply

Shiv Kukreja February 1, 2015 at 11:04 PM

Hi Sundar,
It is on a private placement basis.

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sundararajan February 2, 2015 at 9:37 PM

Hi Shiv,
Thanks for your prompt reply. But I would like to know what is private placement? How to get into that? Considering the min amount is Rs10 lakhs, it is quite high for a retail investor. But if anyone interested, how to get into these kind of investments?
Is it possible to buy them in secondary market as an alternate option?
Please let me know. Thanks,

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Shiv Kukreja February 3, 2015 at 12:31 PM

This is what private placement is – http://en.wikipedia.org/wiki/Private_placement

You need to get in touch with some intermediary to invest in these bonds in private placements. You can buy these bonds from the secondary markets only if they are listed on any of the stock exchanges. Not all of these bonds are listed.

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sundararajan February 4, 2015 at 2:30 AM

Once again thank you for your reply.

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Shiv Kukreja February 4, 2015 at 12:34 PM

You are welcome!

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nitesh patel February 2, 2015 at 12:05 PM

can we sell coal india ofs shares today

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Shiv Kukreja February 2, 2015 at 1:10 PM

Yes, you can sell your Coal India holdings today, if the shares have been credited in your demat account.

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Shiv Kukreja February 2, 2015 at 4:07 PM

Coal India share price closed at Rs. 355.10 in today’s trade.

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rajesh February 2, 2015 at 6:08 PM

My icicidirect account says the coal india ofs shares will be credited on 3rd Feb EOD. Which means I will only be able to sell them from 4th Feb onwards. I had bid at 358.05 and was alloted at 340.15

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Shiv Kukreja February 2, 2015 at 6:26 PM

I don’t understand why these broking houses take so long to credit OFS shares !!

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pradeep February 2, 2015 at 7:15 PM

I have still not recd contract notes 🙁

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pradeep February 4, 2015 at 10:42 AM

shares are credited to my account. I haven’t recd contract notes from HDFC securities

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Shiv Kukreja February 4, 2015 at 12:34 PM

That’s great!

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pradeep February 4, 2015 at 4:00 PM

Is REC ofs next?

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Shiv Kukreja February 5, 2015 at 12:29 PM

No announced by the government yet, but I think it is the best time to divest IOC in the current scenario.

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nitesh patel February 4, 2015 at 10:16 AM

why nhbtf2023 is falling &can we invest now at current levels

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Shiv Kukreja February 4, 2015 at 12:51 PM

Its all demand & supply game. In December-January, the demand was high and therefore the price was rising at a faster speed. I think now it is better to invest in Gilt funds with a time horizon of 3 years as compared to tax-free bonds.

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nitesh patel February 4, 2015 at 2:05 PM

in an early trade nhbtf n6 was 5651 & now 6270 why so many fluctuations in price

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Shiv Kukreja February 5, 2015 at 12:30 PM

That is due to low liquidity.

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Kunal February 9, 2015 at 12:08 PM

Dear Shiv

Can you please review the Mutual Funds coming up under Rajiv Gandhi Equity savings scheme. I believe right now – HDFC RAJIV GANDHI EQUITY SAVINGS SCHEME is Open. It would be good if you can review and list pros and cons of investing there as it seems like close ended with 3 year lock in, but normally everyone advertise equity mutual fund in long term more than 5 yrs or so. Is this scheme or others like it really worth the risk.

Regards
Kunal

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Shiv Kukreja February 9, 2015 at 12:44 PM

Hi Kunal,
I think it is difficult to analyse an NFO, so normally I don’t do it. But, if time permits, I’ll try to provide info about its features.

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Kartavi February 27, 2015 at 7:03 PM

Shiv
As expected by you coal india stock price has reached very near to Rs. 400 levels, very soon. Interim Dividend of Rs 20 per share is also declared. For that we have to keep shares upto 10 Mar 2015 ? What should we do ? Sell at 400 or keep until receipt of dividend ?

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Shiv Kukreja February 27, 2015 at 7:26 PM

Its a personal call. I am quite bullish on PSUs including Coal India. For me, dividend is totally irrelevant. So, dividend or no dividend, I’ll hold on to it for at least 2-3 years. My target for Coal India is Rs. 800+ in 18 months and Rs. 2,000+ in 48-60 months time. Very short term investors can sell this stock tomorrow or whenever they feel satisfied with their 18-20% returns.

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kartavi February 28, 2015 at 9:11 AM

Thanks

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Shiv Kukreja February 28, 2015 at 11:04 AM

You are welcome!

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Shiv Kukreja March 3, 2015 at 3:19 PM

Coal India went ex-dividend today and technically crosses Rs. 400 levels (Rs. 381 + Rs. 20.70 dividend).

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