Coal India's Valuation for Record Share Offering Is `Biggest Attraction'

Coal India Ltd.’s sale of as much as 151.5 billion rupees ($3.4 billion) of stock in the nation’s biggest initial share sale will likely be fully subscribed because the price set by the government is low, investors said.

The state-owned coal producer starts selling 631.6 million shares today. The stock of the state-owned company will be sold in a range of 225 rupees to 245 rupees each, with the proceeds helping the government narrow its budget deficit, Coal Minister Sriprakash Jaiswal said on Oct. 12.

“The IPO will easily get subscribed and that is because the valuation is fair,” said Samir Arora, founder of hedge fund Helios Capital Management Pte. in Singapore, who plans to buy the shares. “That’s the biggest attraction. It’s a large company and it’s relatively cheap.”

Fifteen of 18 investors surveyed by Bloomberg News said they plan to buy shares in the world’s largest coal producer. The sale is the third offering in a state company since April as the government seeks to cut its budget deficit and fund infrastructure projects. Steel Authority of India Ltd., Oil & Natural Gas Corp. and Indian Oil Corp. also plan to sell shares.

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.

‘Cheaper Than Peers’

“The shares are available at a price cheaper than their global peers,” said Deven Choksey, chief executive officer at K.R. Choksey Shares & Securities Pvt., manager of the equivalent of $124 million in assets. “They have large cash holdings on their balance sheet and the world’s largest coal reserves. They haven’t charged a premium for this.”

The IPO by Kolkata, West Bengal-based Coal India would surpass Reliance Power Ltd.’s 116 billion-rupee sale in January 2008 as India’s biggest, data compiled by Bloomberg show. Reliance Power sold shares at 450 rupees apiece and investors ordered shares worth as much as $189 billion. The shares declined 17 percent on its trading debut on Feb. 11, 2008.

Citigroup Inc., Deutsche Bank AG, Bank of America Corp., Enam Securities Pvt., Kotak Mahindra and Morgan Stanley is managing Coal India’s offering. The sale closes on Oct. 21.

Government Target

The share sale will help the government raise 37.8 percent of its 400 billion rupee asset-sale target in the year ending March 31. The South Asian nation has raised 5.2 percent of its target from selling stake in two state companies this year.

Investors are buying shares as India build 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. India’s coal demand may more than triple in the next two decades to 2 billion metric tons, Coal Minister Jaiswal said Sept. 24.

Companies from emerging economies in the Asia-Pacific region raised over $72 billion in initial sales this year, more than triple the amount in the same period in 2009, according to data compiled by Bloomberg. Beijing-based Agricultural Bank of China Ltd. sold $22.1 billion of shares in Shanghai and Hong Kong last quarter in the world’s biggest IPO on record.

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 billion tons, of which 21.75 billion is extractable, the share-sale document shows.

Coal Production

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.

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.

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.