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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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