IPO of Coal India Limited

Coal India limited is the world’s largest Coal miner with revenue exceeding $10.3 billion US. It was formerly owned entirely by the Government of India, under the administrative control of the Ministry of Coal. It is involved in coal mining and production industry.  GoI is now divesting 10 percent of its equity through the public issue of shares. Experts were quite optimistic about the success of the IPO; CARE( Credit Rating and Analysis graded the IPO with 5 out of 5 and the same was reflected in the results when the CIL IPO got subscribed more than 15 times after huge response from investors.

What is the reason for the huge success of CIL IPO and why it is called mother of all IPOs? CIL contributes to around 82% of coal production in India. The balance 18% is

produced mainly for captive consumption by manufacturing/power companies. Thus

practically, CIL holds the monopoly in traded coal available domestically.

It has a highly favorable demand supply situation in the domestic coal industry.

Also CILs strong financial position gives it immense financial flexibility to fund its on-going and planned expansion projects. Moreover, CIL is one of the lowest cost producers giving it a pricing edge over imported coal. The grading also factors experienced management and impressive track record of operations. It can be foreseen that the demand for the domestic coal industry will be mainly driven by the power generation companies. Increasing domestic steel and cement capacities are also likely to further support the domestic coal demand. Hence the off take related risks for CIL

are negligible.

Moreover there are certain other factors that make its IPO a hit. The company is responsible for the entire coal mining sector and it operates along with a number of subsidiaries. The company has an experienced senior management team with many of the members serving the company or its subsidiaries for more than 30 years. The company has a sound corporate governance system, in place. It is practically a debt free company and has healthy profit margins.

However, the prices of coal, being a commodity, are volatile in nature. Hence the profit margins too are volatile for the company. Nevertheless, on account of low operating cost and strong reserves built by the company, the financial soundness is high. Further the shift of the company to a more market linked pricing mechanism is expected to improve its profitability.

It facilitates continuous labor productivity due to the use of technology, and high share of production from open cast mines. Deregulated coal pricing regime gives them the power to price their coal along with other factors like favorable demand – supply, and cost competitiveness.

However, CIL’s operations are affected to some extent by socio-enviromental concerns.

Changes in pricing regulations, delays in obtaining clearances from the forest department

and delay in receipt of regulatory approvals continue to pose a threat to the company’s

operations. An Investors ethical dilemma is whether to support a carbon pumping system or to safeguard more climate friendly energy suppliers. While such boundaries of investment cannot be fixed still it’s a debatable issue.