Coal India Surges 40% on Debut After Record Share Sale

Coal India Ltd. surged 40 percent on its first trading day to become the world’s second-most valuable coal miner after investors bid for 15 times the shares sold in the country’s largest initial public offering.

The stock climbed to 342.55 rupees in Mumbai trading, valuing the company at $49 billion. The benchmark Sensitive Index gained 2.1 percent to a record. Prime Minister Manmohan Singh’s government raised 152 billion rupees ($3.4 billion) last month by selling a 10 percent stake in the world’s largest coal producer at 245 rupees a share.

Investors bid for at least $48.7 billion worth of shares after Coal India offered stock at a discount to global peers and India’s economy grew at the fastest pace in more than two years in the second quarter, spurring energy demand. Asian stocks and commodities rallied following steps by the U.S. Federal Reserve to boost the world’s largest economy.

“There’s a lot of money coming into commodities and emerging markets after the Fed action yesterday,” said Niraj Shah, a Mumbai-based analyst at Fortune Equity Brokers Ltd., who had a price target of 318 rupees for the miner. “Coal India is a near-monopoly supplier in India and energy demand will only continue to increase. I wouldn’t be surprised if the share hits 400 rupees.”

Asian stocks climbed today, pushing the MSCI Asia Pacific Index to a more than two-year high, and commodities gained after the Fed said yesterday it would buy $600 billion in Treasuries.

Unexpected Gains

“We had expected some gains on listing and had built that into the price,” Chairman Partha Bhattacharyya said in an interview with Bloomberg-UTV today. “But we didn’t expect this much gains.”

Indian companies raised a record 350 billion rupees in IPOs this year, according to data compiled by Bloomberg. Coal India helped cement Kotak Mahindra Capital Co.’s ranking as the top arranger of initial share sales in India. Bank of America Corp., Citigroup Inc., Deutsche Bank AG and Enam Securities Pvt. were the other managers for Coal India’s sale.

The company was initiated at “outperform” by Credit Suisse Group AG, which cited the country’s chronic coal shortages and the company’s “superior” earnings. The brokerage set its share-price target at 350 rupees, according to a report by Mumbai-based Neelkanth Mishra and Riya Bhattacharya.

Money Supply

Macquarie Group Ltd. analysts Rakesh Arora and Samidha Gehlot in Mumbai initiated coverage at “outperform” with a target of 338 rupees.

“We always thought 300 rupees was a fair price,” Coal Minister Sriprakash Jaiswal said in New Delhi today. “But we kept the range reasonable to encourage more participation.”

Investors pulled money from banks to buy the Kolkata-based company’s shares, causing rates for three-month corporate debt to almost double this year.

The Reserve Bank of India said on Oct. 29 that it would inject funds into the banking system by conducting special repurchase auctions to ease the cash crunch after overnight lending rates touched 12.25 percent, the highest level since Nov. 1, 2008. The central bank is intervening to buy government bonds for the first time in more than a year.

The rate of money-supply expansion in India fell to a five-year low of 15 percent in the two weeks through mid-October.

State Sales

The response was a boost for the government’s plan to sell shares in seven more companies in the next five months as it aims to raise about 400 billion rupees to help cut the budget deficit and fund infrastructure projects. A follow-on offer in Power Grid Corp. of India Ltd. is due to start Nov. 9.

“If India is growing, you will see these records getting broken as IPOs get bigger and bigger,” said Vallabh Bhansali, chairman of Enam Securities.

Indian companies have announced 121 initial offerings in 2010, four times the number a year earlier, according to Bloomberg. First-time share sellers in the South Asian nation this year, excluding Coal India, gained an average 12 percent on listing, the data show.

The benchmark Sensitive Index has advanced 20 percent this year, fuelled by foreign investor inflows. Overseas investors have poured a record 1.2 trillion rupees into Asia’s fourth-biggest equity market this year.

Relative Value

At 245 rupees a share, Coal India’s price-to-earnings ratio for the year ending March 31 was 13.7, according to Ashutosh Tiwari, an analyst at Equirus Securities Pvt. in Ahmedabad. That compares with 17 times for Peabody Energy Corp., the largest U.S. coal producer, and 16 times for China Shenhua Energy Co. in the year ending Dec. 31, he said.

Coal India and its units, which account for 82 percent of the nation’s production of the fuel, posted a net income of 25.2 billion rupees in the three months ended June 30, according to the IPO prospectus. Profit in the year ended March 31 more than doubled to 98.3 billion rupees and sales rose 15 percent to 446.2 billion rupees.

China Shenhua Energy, a unit of the nation’s largest coal producer, has a market value of about $87 billion and Peabody Energy $15 billion, according to data compiled by Bloomberg.

India’s coal demand may more than triple in the next two decades to 2 billion metric tons, Minister Jaiswal said on Sept. 24. The country is building power plants and steel mills to meet demand in the $1.3 trillion economy, which expanded 8.8 percent in the three months ended June 30, the fastest pace in 2 1/2 years.

Coal Production

The country produces 530 million tons of coal a year and imports about 67 million tons, Jaiswal said then. Coal India has proven reserves of 52.55 billion tons, of which 21.75 billion is extractable, the company’s share-sale document shows.

The environment and coal ministries are jointly identifying areas to find ways to boost coal production in Asia’s second fastest-growing economy. Coal India has to seek environmental approvals for mining in densely forested areas that are estimated to hold half of its future output.

India’s government has pledged to provide electricity nationwide by 2012 and needs to increase installed generation capacity to 200,000 megawatts to sustain economic growth, according to the power ministry. Coal is used to generate more than half of the current capacity of 164,836 megawatts.

(Updates with Reserve Bank of India’s response to cash shortage in ‘Money Supply’ section.)
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