Coal India's $3.4 Billion IPO Wins Investors on Energy Demand

Coal India Ltd. may sell as much as 151.5 billion rupees ($3.4 billion) of stock in the nation’s biggest initial share sale as investors bet surging energy demand will override environmental delays for new mines.

Fifteen of 18 investors surveyed by Bloomberg News said they plan to bid for shares in the world’s largest coal producer. The stock of the state-owned company will be sold in a range of 225 rupees to 245 rupees each, starting Oct. 18, with the proceeds helping the government narrow its budget deficit, Coal Minister Sriprakash Jaiswal said on Oct. 12.

“Apply to buy as much as you can,” said Manish Sonthalia, who manages $230 million in equities at Motilal Oswal Securities Ltd. in Mumbai, who’s advising investors to bid at the top end of the range. The stock could gain 34 percent in the first year, said Sonthalia.

India’s coal imports surged 16 percent in the year ended March 31 as power plants burned more of the fuel to meet demand in Asia’s second-fastest growing major economy. Coal India will seek environmental clearances from the government to mine in densely forested areas in states including Jharkhand and Chhattisgarh estimated to hold half of its future output.

“We are talking of a company which doesn’t only have one of the largest reserves and production, but also has a large captive market,” said P. Phani Sekhar, a fund manager at Angel Broking Ltd. in Mumbai. “That should make this IPO attractive.”

Prime Minister Manmohan Singh’s government plans to sell shares in state-run companies to raise 400 billion rupees this year to trim a budget deficit. The sale of a 10 percent stake in Coal India could help the government meet about 38 percent of the asset-sale target and may surpass the 116 billion rupees raised by billionaire Anil Ambani’s Reliance Power Ltd. in January 2008.

Rising Coal Demand

India’s coal demand may more than triple in the next two decades to 2 billion metric tons, Coal Minister Jaiswal said Sept. 24. The country is building power plants and steel mills to keep pace with an economy that expanded at the fastest pace in 2 1/2 years in the three months ended June 30.

The nation produces 530 million tons of coal a year and imports about 67 million tons annually. Coal India has proven reserves of 52.55 million tons, of which 21.75 million is extractable, the share-sale document shows.

Coal India may miss its production targets for 2011 and 2012 because of delays in environmental clearances, Chairman Partha Bhattacharyya said on Oct. 13, without providing the new estimates.

The company had aimed to produce 460 million tons in 2011 and 486 million tons the next year, Bhattacharya said on May 20. Environmental approvals to prospect for more reserves take as long as seven years in India, he said. Those delays are a concern for some investors.

Dead Money?

“They have to improve production and get access to new mines under forests,” said Taina Erajuuri, who helps manage the equivalent of $1.2 billion of emerging market stocks at Helsinki-based Fim Asset Management, which has invested in four Indian IPOs this year, all non-state companies. “Else it will be dead money. You invest and the shares don’t increase later.”

Maoist insurgents are also a risk. Rebels are active in seven eastern and central states with 40 billion tons of India’s 46 billion tons of proven coal reserves, according to CLSA Asia-Pacific Markets estimates.

The insurgents are based in the forests of the eastern state of Chhattisgarh, which has accounted for almost half of the 573 police and civilians killed in Maoist violence in the first half of this year.

‘No-go’ Areas

The environment and coal ministries are jointly identifying areas for coal mining designated as “go” and “no-go” areas to find ways to boost output of the fuel to meet surging demand.

“No-go” areas are locations with medium or heavy density forests while degraded forests are go-areas, Minister for Environment and Forests Jairam Ramesh said in June last year. Ramesh rejected last month Vedanta Resources Plc’s planned bauxite mine and halted in August two hydropower projects.

“The no-go areas make up almost 50 percent of their future projections,” said S.K. Chand, a New Delhi-based senior fellow at The Energy and Resources Institute. “Older blocks are dwindling and they need new blocks.”