Coal India OFS: Institutional buyers portion oversubscribed but stock falls

• The government said on Wednesday that it plans to sell upto 3% stake in Coal India via an offer-for-sale (OFS).
  
  
• The portion reserved for institutional buyers was oversubscribed by Thursday afternoon.
  
  
• The shares of Coal India fell after the announcement, and were down by 4.7%.
  
  
• Coal India’s board approved a price hike of 8% on higher grade coal, and analysts say that it can bring in substantial benefits.

The Indian government's move to go in for an offer-for-sale (OFS) in Coal India seems to have had a smooth start on the first day. The institutional buyers portion of the OFS was oversubscribed by noon. However, the market has not taken kindly to the action as the stock of the mega public sector unit fell 4.4% on Thursday.

As against 8.31 crore shares of offer, investors have put in bids for 8.74 crore shares, representing 105.04% of the offer size reserved for them, at 1:20 pm. Bidding will continue till close of market hours.

The government announced on late Wednesday that it plans to sell upto 3% stake in Coal India, accounting to 18.5 crore shares via an offer-for-sale (OFS). The floor price for OFS was set at ₹225 per share, that’s at a 7% discount to current market price. The sale also has a greenshoe option of 1.5% in case of oversubscription.

The bidding for retail investors will take place on Friday. If the issue is fully subscribed, the government can raise as much as ₹4,000 crore. The government holds 66.13% stake in the company.

The price hike trigger

Coal India said on Wednesday that its board of directors approved a price hike of 8% on higher grade coal with effect from 31 May. Coal India sells almost 80% of its coal in these grades, and it can benefit the company substantially, say analysts.

According to a report by ICICI Securities, it can translate into a benefit of ₹2,703 crore for the remaining part of FY24. “Despite the high-grade coal production being limited to subsidiaries such as Bharat Coking Coal (BCCL) and Central Coalfields (CCL), we believe the price hike is likely to partially allay investor concerns about the adverse impact of the recent wage hike on profitability,” it said.

The street has been worried about a wage hike given by the company that translated to an adverse cost impact of ₹6,000 crore. This price hike can soften the wage hike hit by at least 50%, says analysts at ICICI Securities.

“More such increases are unlikely in the near term, considering the inflationary environment and upcoming elections,” says a Motilal Oswal report, reiterating its ‘buy’ rating on the stock with a revised target price of ₹290.

The last fuel supply agreements (FSA) price revision was taken in 2018. “The price hike comes at an opportune time when most investors were not expecting it. In our estimates, we did not consider any price hike in light of the prevailing adverse macros,” said ICICI Securities which revised its earnings per share for FY24E and FY25E by ₹3.5 and ₹4 respectively.

The research firm also believes some of the incremental earnings would be distributed as dividend, further sweetening the 9% expected dividend yield for the next two financial years.

(With inputs from PTI)

SEE ALSO

Kotak report sounds a warning for the ‘nonchalant’ Indian market investor

IPL nail biters, munchies and the demand for ‘sides’