Coal India is in demand on debut

Coal India’s $3.5bn share sale, set to be the country’s biggest initial public offering to date, was 12 times subscribed on the third day of bidding as foreign investors seeking emerging markets exposure bought the stock.

The institutional portion of the offering on Wednesday covered 22 times the shares available in the state-run company. Most of the bids came at the top of Coal India’s Rs225-Rs245 IPO price range, valuing the world’s largest coal miner at about $35bn. Investors have been pouring billions of dollars into emerging economies such as India, which has seen capital inflows hit record levels this year.

The country’s stock market has been booming. The Bombay Stock Exchange’s benchmark Sensex index has risen about 15 per cent this year, driven by the influx of capital from western economies. India’s equity markets have attracted a record $24bn in foreign investment so far this year.

A string of IPOs of state-run companies will follow Coal India’s and are expected to attract more foreign capital. Sonal Varma, chief India economist for Nomura, said the spike in inflows coupled with the widest current account deficit in 20 years, indicated that Asia’s third-largest economy was at risk of overheating.

Several market analysts, though, believe the economy, which grew 8.8 per cent year-on-year in the second quarter, will be able to absorb the extra capital.

Rashesh Shah, chairman of Mumbai-based financial services house Edelweiss Group, said: “At the moment there is no risk of overheating, the economy should be able to manage inflows up to $50bn.” Investors enthusiastically backed Coal India as they expect it will benefit from rising global demand for energy.

Crisil, the Indian ratings agency owned by Standard & Poor’s, assigned a score of 5-out-of-5 to Coal India’s IPO, as it pointed out that “the fundamentals of the IPO are ‘strong’ relative to the other listed equity securities in India”.

The miner has a cash pile of Rs390bn ($8.8bn), of which it plans to spend at least $1.2bn on acquiring overseas assets. The group made a net profit of Rs98.3bn in the last fiscal year on revenue of Rs526bn. But there are several regulatory and environmental hurdles that may delay an increase in production in the short-term.

Longer term risks include a new mining policy that may force Coal India to share profits with local communities affected by mining operations and the growing threat of Maoist attacks in the mining regions.

This week, Partha S. Bhattacharyya, Coal India’s chairman, told beyondbrics, the Financial Times’ emerging markets online hub, that the company had full government support to deal with the Maoist insurgents. He added that it was in talks to obtain the necessary environmental approvals to keep production rising at 6 per cent a year.