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October 11, 2010Coal India is coming out with India’s biggest IPO offering in the Indian Stock Market History.The company seems fundamentally strong on almost all aspects and is also pricing itself at a significant discount to its global peers.Both superficially and deep down,the analysis points CIL to be a very safe investment at a cheap valuation.Other analysts are also coming to the same conclusion,as Rating Agency has given CIL a 5/5 Rating which is probably the first in the history of IPO Grading .In order to give a more balanced perspective and avoid herd tendencies,I am listing out what the risks and negatives are with this company.Note this does not make me negative on the stock on which I am very positively biased.It is just to give investors the other side of the debate which I think general analysis will lack.
1) Low Quality of Coal Reservers – Indian Coal is of typically low content with high amounts of impurities making it unusable in industries like the steel industry where higher quality is a must.Also low calorific content of coal makes CIL Coal of lower value leading to lower realizations.
2) Inefficient Mining Practises – CIL is not exactly a well run modern mining company on the lines of BHP Billton or Rio Tinto.The Company with a long history tracing to British days is organized haphazardly with a number of subsidiaries.It Mining Operations are hardly efficient and its expertise in Underground Mining of coal as opposed to Open Casting Mining is quite suspect
3) Dangers of Being Government Owned – Government owned Fossil Fuel Companies like IOC,ONGC,BPCL have a long history of subsidies and losses.The profits and losses of these companies despite being listed on the public markets are subject to the whims and fancies of the government.The Company prices its products significantly below international market costs which has little justification.Though the Company manages to get 15% Net Margins,it could change drastically depending on the fickle nature of the Party in Power.The Government is planning a new legislation which will lead to giving of 20% of profits of mining companies to local communities.CIL being government owned will definitely come under the ambit of this proposed law leading to a potential decrease in profits.
Mining PSUs raise red flag over govt’s profit sharing plan – IE
While government’s efforts to mandate mining companies to share profits with those displaced by projects has received a general endorsement, the move has left both state-run and private companies a worried lot. In their offer documents for upcoming public offers, at least two PSUs have aired their concerns. In their draft offer documents filed with market regulator Sebi recently, the two firms listed the Bill as one of the internal risk factors that could make investors wary and depress valuations
4) Growth Rate is not Fantastic by Any Means – CIL has managed a decent growth of around 10% which it will find difficult to accelerate despite huge demand due to its not so competent management and organization.The Company’s structure won’t change radically with public listing overnight.So while CIL should be a good safe investment,it might not be a multi-bagger in the near future.
5) Global Carbon Tax and Climate Change Legislation – Coal is the Dirtiest form of Energy and its cheapness is due to the fact that implicit costs on the society are not added to Coal.It is already well known that Coal has huge pollution and health costs.Mercury poisoning,Degradation of Land and Ecology are some of the other negative environmental effects of Coal Mining and Usage.Its no wonder that Coal India’s Advertisements show Afforestation Measures to try and bolster its Green Credentials.But make no mistake CIL is the biggest polluter in India.A Global Carbon Tax or something to that effect might radically change the structure of the Coal Industry quite negatively
6) Pilferage and Corruption – Illegal Coal Mining,Stealing and Pilferage is an Institutionalized Form of Corruption in India.Whole Villages in India’s Coal Belt in West Bengal,Jharkhand subsist through stealing of Coal.The Coal Mafia in India is a powerful one with government links.Coal India suffers big losses though it is not been adequately disclosed in the Red Herring Prospectus.
Summary
Despite the above Risks , I think that Coal India is one of the best quality stocks to come out in India’s Primary Markets.However investors should be wary of the risks which will be glossed over by the mainstream media and brokerages . As with every investment however safe it might look,there are risks.This does not mean that investors should be fearful of every investment.It is by being aware of the risks,that prudent risk management can be done which is essential to successful investing.
1 Comment
Well captured!