Coal India Offer for Sale (OFS) – January 2015

by Shiv Kukreja on January 30, 2015

in Uncategorized

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.

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