Coal India ltd:

14 OCT, 2010, 06.32PM IST,PT

Coal India's 15k cr issue may cause money mkt stress: Experts
NEW DELHI: State-owned Coal India Ltd's mega public float, which hits the Dalal Street on
October 18, may cause stress in the money market as investors are expected to borrow heavily to
subscribe to the issue, which is expected to garner around Rs 15,000 crore, analysts said. 

The largest ever IPO in the history of corporate India will have some temporary stress in the
money market as liquidity is likely to shift from general banking system to financing the issue,
they said. 

Money market experts believe that roughly the total liquidity impact could be about Rs 1.5 lakh
crore. 

"The liquidity tightness during a large IPO occurs as a result of fact that many bids are financed
through borrowing. This leverage shows up as a temporary expansion in the credit during the
IPO period," Axis Mutual Fund said in a note. 

"The larger the share offer, the larger is the impact on credit and money markets. Thus large
IPOs are associated with tight liquidity and rising money market rates," it said. 

Two and a half years ago, another large IPO -- Reliance Power -- had also caused some
temporary stress in the money market. In India's biggest IPO till date, the Anil Ambani Group
company had raised Rs 11,500 crore in January 2008. 

Besides, this time, FIIs (and institutions in general) are required to put up cash equal to their bids
instead of the previous practice of only 10 per cent of the bid amount. 

According to people tracking the primary market, inflows from foreign institutional investors are
likely to be around Rs 70,000 crore during CIL IPO. 

They said that although about 90 per cent of this inflow would flow back at the end of the IPO
period, its implications for forex market and the domestic money market will be big. 

It is possible there could be some temporary volatility or strength in the currency during this
period. 

A money market dealer said that a minor appreciation in Indian rupee due to this heavy inflow
cannot be ruled out. 

The CIL IPO has seen a broad endorsement from almost all the big as well as small investment
banking firms. 
Aiming to garner over Rs 15,000 crore through the largest ever public offering in India, the
government has fixed the price band of CIL IPO at Rs 225-245 a share. The Centre is divesting
its 10 per cent stake in the Navratna company. 

The success of the offering would also determine the success of the government's divestment
plans for the current year and would contribute to keeping the fiscal deficit within the target for
the year. 

The world's largest coal producer is expected to commence trading on the domestic bourses by
November 4. 

"We believe that CIL deserves to trade at a premium to global coal peers given much lower
volatility of earnings and large headroom to raise prices in a supply-deficit environment," CLSA
said in a note. 

CIL is one of the largest companies in the world based on the coal reserves of 64,786 million
tonne as on April 2010. 

"Coal India IPO would be historic public issue in many metrics. If Commonwealth Games are an
answer to China's Olympics, then Coal India IPO may prove to be the answer to Agricultural
Bank of China's USD 20 billion IPO," SMC Global Securities Strategist & Head of Research
Jagannadham Thunuguntla said. 

According to India Infoline Ltd's Head of Research Amar Ambani, with a possible appreciation
to USD 50 billion market capitalisation over time, this company adds to the quality of stock
available on Indian bourses. Lower earnings volatility, large undeveloped resource base and the
potential to improve realisations warrant a premium to global peers.
14 OCT, 2010, 01.56AM IST, SHAILESH MENON,ET BUREAU

MFs create cash 'buffer' for a bigger Coal India pie

MUMBAI: Many domestic mutual funds, which have been net-sellers of shares for most part of
this calendar, are raring to have a go at the upcoming Coal India public issue. Most funds are
creating significant cash levels so that they can subscribe to the Rs 15,000-crore issue. 

Asset management companies (AMCs), which have specialised mining, power, energy and
multi-commodity funds, will apply for larger number of shares, since many of them feel the issue
is reasonably priced. There are about 10 mutual fund schemes that specifically invest in natural
resources companies. 

“We’ll apply for the Coal India issue across schemes. Fund deployment will not be a problem for
us, as we are currently holding 10% of our assets in cash,” said Jagveer Singh Fauzdar, equity
fund manager, Escorts Mutual Fund, which has an exclusive power & energy fund. 

Coal India (CIL) is the largest coal producing company in the world, based on raw coal
production of 431.26 million tonne in the financial year 2010. It is also the largest coal reserves
holder in the world. The company is offering 63.16 crore equity shares through the issue, which
opens for subscription on next Monday. 

“We expect the IPO to do well, since it’s very decently priced. There are about 65 listed mining
companies in the world and a good number of them are commanding a price-to-earnings (P/E) of
about 21 times; CIL, which has got volumnous coal reserves, is priced at just about 15 times.
This aspect makes it a compelling buy,” Mr Fauzdar added. 

Fund managers are expecting decent interest from all sections of investors. Mining & minerals,
as a sector, has not really been on the radar of institutional investors, barring exceptions like
Gujarat NRE Coke and Sesa Goa . “We expect the CIL issue to get subscribed 4-5 times. Mutual
funds will create cash to invest in CIL, as it is a good stock to own at current price levels,” said
A Balasubramanian, CEO, Birla Sunlife Mutual Fund. 

According to fund industry sources, high net worth investors have already started redeeming
their investments from short-term debt funds. Fund houses expect the trend to stretch out to
institutions as well. “There will be some impact on liquidity. 

Investors will rejig their portfolios or book profits to invest in the issue. Money is also expected
to flow out from short-term debt funds,” said Lakshmi Iyer, head-fixed income & products,
Kotak Mutual Fund.

Government bets big on divestment

Plans to raise Rs40,000 crore by selling stake in state-owned firms in 2010-11 are realistic,
say stock market intermediaries who believe there is ample appetite for such stock

Mumbai: People’s ownership of state-owned firms, the finance minister’s preferred term to describe
the government’s divestment programme, will be one of the two big contributors Pranab Mukherjee is
banking on to bring down the fiscal deficit to 5.5%. Buoyed by the success of this programme in tough
market conditions this year, the Centre wants to raise Rs40,000 crore by selling its stake in state-
owned firms in 2010-11. Market intermediaries say there is enough appetite for government papers
and that it could end up raising more.

Target set: The Centre eventually expects to raise

Rs40,000 crore in the next fiscal from divestment.
Rafiq Maqbool / AP

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This is the biggest and most ambitious target in the

history of disinvestment programme that started in
1992. It is nearly thrice the target of 2003-04
(Rs14,500 crore) when Arun Shourie was minister for disinvestment in the Bharatiya Janata Party-led
National Democratic Alliance government.

State-owned firms have so far raised Rs17,295 crore this fiscal through divestment and fresh issue of
shares. This is more than what they had raised in 2003-04—a record Rs16,563 crore—after which
divestment fell off the radar of the government following the ascension of the Communists-supported
United Progressive Alliance government to power in May 2004.

The government eventually expects to raise Rs25,000 crore in the current year as the process of
selling shares of National Mineral Development Corp. Ltd and Satluj Jal Vidyut Nigam Ltd to the
market is on.

“The proceeds will be utilized to meet the capital expenditure requirements of social sector schemes
for creating new assets,” Mukherjee said in his Budget speech.

Prithvi Haldea, chairman and managing director, Prime Database, a Delhi-based primary market
tracker, said though there is enough appetite for absorbing these government papers, the success of
the coming issues will depend on market volatility and pricing. “The government cannot repeat REC
(Rural Electrification Corp. Ltd) and NTPC (Ltd) any more. They have to provide 15-20% discount for
retail investors.”

Haldea’s reference is to the lacklustre showing of the NTPC share sale and eleventh hour success of
the REC one.

Major shocks in the international markets could also play a role in the divestment process, said A.
Murugappan, executive director, ICICI Securities Ltd, a book running lead manager for recent
government issues.

“Negative news flowing in from China will divert FII (foreign institutional investors) flows into India
and this will support the divestment programmes,” he added.

India’s bellwether stock index BSE’s Sensex ended the day with a gain of 175 points or 1.08% even
after surrendering half of what it had gained while Mukherjee was presenting the Budget. This is the
best Budget day rally for the markets since 2005, when it gained a little over 2%.

Sensex earnings are pegged at above 20% for FY11 and if this continues, the investor sentiment
towards share sales by state-owned firms will improve, Murugappan said.

Arun Kejriwal, director, Kejriwal Research and Investment Services Pvt. Ltd, said the market-friendly
tone in the Budget is aimed at helping divestment. “This year, they planned to raise about Rs1,100
crore, but will end up raising much more. Next year, the target is Rs40,000 crore, but they may raise
more.”

According to Haldea, the auction process in follow-on share sales needs some tweaking to attract
more foreign capital. “The French auction for institutional investors should be conducted on a close-
book system. A close-book auction process will attract higher bids from FIIs and other institutions,” he
said.
At present, the bidding in follow-on offers takes place through an open book, where bids can be seen
by all bidders.

In a closed book system, bidders can’t see other bids and this helps the issuer attract bids at higher
prices.

In four of the five Budgets presented by the first UPA government, there was no official disinvestment
target. But after the 2009 general election, the UPA came back to power without any support from the
Left and disinvestment came back on its radar.

According to Bsepsu.com, at least 114 divestment offers are in the pipeline. These include 56 initial
public offerings and 24 follow-on public offerings (FPOs) by Union government-owned firms, with the
FPOs of National Mining Development Corp. and Steel Authority of India Ltd being the largest.

At least 19 public sector banks and five state-level public sector firms too plan to float public offers
and these are part of the divestment road map.

Of the total of 214 Central public sector enterprises and their subsidiaries in operation, only 46 are
listed. Of these, 44 are listed on BSE and account for 26% of the total market capitalization of the
4,883 companies listed on the exchange.

In addition, 26 public sector banks with their subsidiaries and six state-level public enterprises,
account for another 5% of the total market capitalization of BSE.

Collectively, all state-owned firms with a Rs18.3 trillion market cap constitute 30.9% of the total
market capitalization of BSE-listed firms.