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Coal India's Offer For Sale: Lack of Profit Growth Even With Monopoly Scares Us Off

Coal India has an offer for sale out today.

  • 31 cr. shares for sale on the exchanges
  • This should raise Rs. 10,000 cr.
  • If there is more demand, they will sell another 10,000 cr. worth
  • Retail investors get about 5% discount (for upto Rs. 200,000 invested)

You can buy through your broker.

So Should I Sell My House and Buy?

The Short Answer: No.

So What’s the Long Answer?


Oh Come on.

Ok, I’ll stop messing around.

Coal India is a quasi monopoly for coal mining in India. We use a lot of coal. Not just to blacken someone’s face when they made cartoons we didn’t like, which has substantial demand and major growth potential considering just the mad people on twitter. But that is not where we use coal.

We use coal in Thermal power plants. Of which we have a lot. I don’t have time to actually count them but we have a lot. We also import coal from places like Australia. Okay, 50% of our coal imports are from Australia. But locally, Coal India is the source for coal.

Coal India mines coal and then sells it. Typically it is sold at lower than international prices to make power affordable. Coal India still makes a profit because, heck, it got those mines for nothing.

It’s profitability, though, has not been showing the kind of growth a monopoly should have:

image The Revenue growth YoY is like 4% and EPS has actually fallen from 4.83 to 3.47. This is not how a monopoly in a power starved country should behave.

It can’t raise prices because the government wants power plants to get coal cheaper, and it can’t get more efficient or automate a lot more because the Unions don’t like it. So it’s a rough story.

The Chart, Too, Sucks

Coal India's Offer For Sale: Lack of Profit Growth Even With Monopoly Scares Us Off

The stock is now at 362 or so, down 3% today. The chart is not exciting. After it’s break out during elections, it’s struggled to stay where it is.

It gave a mega dividend last year (Rs. 29) and I think the assumption was it will do so this year also. I think that’s not going to happen.

It’s a commodity play and coal prices worldwide have fallen big time.  P/E of 16 is high for a commodity play, especially when prices are down.

It goes up because it’s in the Nifty – people buy it because they want to be part of the index and it goes up according to the money flowing in. And we know that a lot of foreign money has been flowing in.

Overall this hasn’t been a great trade though it’s gone up like 30% since last year…I just don’t think this keeps going up. Plus there is the whole strike drama that might happen once auctions are through. Auctions too will reduce Coal India’s revenue as private players come in, and potentially are more efficient at producing coal.

My Action: Not buying

Wouldn’t bother but it’s better than most PSU banks, because it has that monopoly.

I don’t know how many more thermal plants are coming online, and if Coal India will get efficient, because that will drive either revenue or margins higher. But it doesn’t look very good for the co. In the short term

Plus, I think if results were good they would have announced before the OFS. I get this nitpicky feeling the results will be a bad surprise, just because they haven’t announced it. (Think about it: if you were trying to sell shares and you had good results, wouldn’t you announce the results earlier? Or delay the OFS till results, which have to come by Feb 15?)

Currently, as about 2 hours are left, Demand is less than 25% of the overall issue. This government, like earlier ones, might be calling certain companies to come in before 3:30, such as those named Life Insurance Corporation of India. New emperor, same clothes? This day will tell.


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  • Tarun Dua says:

    What you are discounting perhaps is the fact that they are going to use this money to do all the things you have mentioned they are not doing today.
    1. VRS to employees to break the power of unions
    2. Increase in productivity per employee as the power of unions gets broken.
    So as soon as money flows in the story shall improve and so shall the stock price.
    PS: I am not buying today either, mostly because I don’t invest into stocks/mutual funds 😉

  • I thought they learnt not to misprice after so many IPO/FPO. So last few OFS and FPO was priced reaonably. Near term hicups is already priced in.

  • Gaurav says:

    Hi Deepak,
    Nicely analyzed 🙂 – wouldn’t touch it with a ten foot pole! Wondering when and if the government will ever sell their stake in these turds like Air India, Coal India, FCI (shudder). But the problems you mentioned – unions, political interference, plague all PSU’s don’t they? Is any PSU stock out there even worth buying? I know I’m generalizing… but overall the track record of PSU’s as wealth creators sadly can’t measure up to the private sector.

  • Priyank Chheda says:

    Dear Deepak,
    How about the coal india story for long term investment (3-5 Years). PAT Margins have been 20% + (except for last quarter) & EBITDA average Margins ~35% (except for last quarter)
    Doesn’t it seems Modi government will give some booster to its own PSU generating around 70k cr revenue..?
    I’m participating in commodity downside cycle. Is it not to enter at current levels and offload when cycle reverses.

    • Hi Priyank,
      With no revenue growth, PAT margins really don’t matter (and they should be even more given they are a monopoly!) I don’t think Modi’s going to do anything specific for PSUs or for Coal India.
      Commodity cycle – not sure this is the bottom or

      • VIVEK says:

        But dont you think coal india perf set to improve due to
        1)Dynamic new govt with a dynamic new coal minister n Coal Secy and new full time chairman
        2)Volume growth of 7-8% already visible in first 9 months ending Dec 14
        3) Cola India a monploy with pricing power
        4) Price increase expected as price still much below international prices and to take care of new wage increases and stop black marketing
        5) With increasing production increase in volume of E auction also expected
        6) Private miners to bid shortly under SC instructed auction increasing the intrinsic vale of mines of coal india
        7) Forward 1 year PE of 10 as per Angel and Nomura reports
        8) Div yield of 5%
        9) Increasing efficiency as competition creeps in post auction of mines
        10) Increasing production by NCL n MCL due to increased outsourcing and naturall attrition of cola india bloated work force by retirement
        11)Huge opp size as huge demand in power in India
        12) Better coordination already visible in last 8 months of Modi Govt between Coal.environment and rail ministries
        13) New cogent initiatives of swapping of imported coal between Chattisgarh n Gujrat located plants leading to massive savings.
        14) Taming of unions visible due to successful OFS
        15) Better rail linkage expected due to substantial work done in new rail lines for increased offtake

        • Actually I believe many of these are negatives. 10 is a tough forward P/E and even if so it’s much higher than international coal prices. Efficiency will not increase, period, and that’s why Coal India will suffer with competition. The auctions are negative for CIL because people will be able to get coal elsewhere. Power demand is already factored into price negotiations and volumes, they can’t meet demand. Rail is the only thing good for it, but coal rail linkages are supposedly tiny for the overall size (this rail budget may change things).
          increased volumes: Uptil Jan 6 they’ve produced 349 mill Te of Coal in total. At best that’s like 10% higher than last year, probably end up with less than 10% in the year too.
          This dynamic minister, PM etc. are all for show. Things need to be done on the ground, and honestly, nothing major has happened. Till now, it’s all talk and no real results. The only really smart thing till now has been the evisas for tourism. So let’s leave that argument aside.

  • VIVEK says:

    hmmm thats a very biased POV Deepak.Anil Swarup the coal Secy is a ,a man of action.he was even in corrupt lethargic UPA regime and left his mark.Seems u dont stay in Delhi so u r so biased against Modi n his ministers .Motibagh the den of senior IAS officers is buzzing with action at 8 AM and everyone is in office by 845 AM unlike old UPA time when it used to be 11 AM to $ PM with an hour or 2 break for lunch.
    Price of coal by coal india at 24USD per tonne is much lower then intl price and acts as a good buffer for assured profitability with even a slight price increase .10% volume growth acknowledged by you is great and speaks good about new team at helm.these 2 points itself will imply good future for Coal India.
    Nomura has price target of 442,IIFL 432 ,Morningstar 380,Angel 440 and list is very long.
    also pl reply to pt 13,10,12 and 14 please raised by me.

    • I don’t think the fact that someone’s in office for longer makes an iota of difference. Nothing much has happened in the last few months mate. And this is the feeling not just because people are saying it, it’s because the data is saying it. Coal India’s less than 10% is no great shakes, and we will likely come to a point where import prices reach parity too!
      On your other points – these are not data, not facts.They are just opinions. Like “taming of unions”. They haven’t been “tamed”, they will probably create a bigger ruckus later, or still continue to be inefficient. The only thing good is swapping of coal, which won’t help Coal India that much, honestly. (Btw imported coal volumes have dropped quite a bit as well)