Coal India's Offer for Sale - Reason to Invest?

Many years ago I had done an analysis on IPOs of 2010 and also had discussed Coal India as part of the list. See - "IPOs of 2010 - A Reflection"

A few facts of the Coal India IPO.
- Discovered price after closure of book-building - Rs. 245.00
- Listing Date: November 4, 2010
- Closing price on day of listing: Rs. 342.35
- % Return on day of listing: 39.73%
- Issue was oversubscribed by 15 times.

Since the day of listing and till Jan 29, 2015 the company has given dividend 7 times for a total of Rs. 569/-. Please remember the share price falls (at the minimum) to the extent of the dividend paid on the ex-dividend date.


Today's Offer for Sale (OFS) was oversubscribed at 1.1 times at the base price of Rs. 358/-. Taking the closing price from the day of listing and the base price, the annualized gain (across the 4 years) is 1.14%.

I have considered the closing price on listing day as that is the 'discovered price' after the stock has gone through the gyrations of the stock market. The price of a share in the stock market takes into account many factors and hence is a more accurate reflection of the true value of the stock than what merchant bankers decide during an IPO / FPO / OFS.

So here are my inferences:
- Despite the coal shortage in  the country and the monopoly Coal India enjoys, its output has not increased substantially since the time of its IPO. If it had, the share price should have been much higher today.
- OFS route is the quickest route to sell shares. In the last few years, instead of "Follow-on Public Offer" (FPO), the government (in order to meet its disinvestment targets) has been using OFS route.
- Why the OFS route? The government can coerce its other companies (like LIC, SBI, etc.) to buy the shares and ensure the OFS is successful.
- Coal India was trading at Rs. 394/- on Jan 27, 2015, a day before the OFS date was announced, a drop of 10% in 3 trading days.

OFS is a route where the promoter is trying to offload his holdings to make a quick buck. The share price will fall slightly more in the following week when the shares are allotted to the people who subscribed to the issue. It could be a better opportunity to buy the share then!

If a company has great prospects, then the promoter should be either using the cash reserves to expand capacities or perhaps doing a buy-back if the share price does not reflect the true value of its future business.

Paying huge dividends, FPOs, OFS, etc. especially by Government companies is to just find a way to generate revenue to meet their budgetary targets and in turn window dress the fiscal deficit. :-)

IPOs of 2010 - A Reflection

Thought I would share my analysis of IPOs of 2010; a year which saw the stock market run upto 21K on the Sensex and then started to taper off. Today the Sensex is at almost 19K.

• There were 64 odd companies which tapped the primary market (IPOs).
• I have excluded 6 FPOs from my analysis (SCI, Power Grid, NTPC, REC, Engineers India, NMDC).
• IPO ratings have also been a new feature among most of the IPOs. Ratings were to help investors make better judgments before they invested in companies.
• The credit agencies (some of them are well-known) are CRISIL, CARE, ICRA, Fitch & Brickworks.
• Ratings are on a scale of 1 to 5 with 5 being the highest.
• Absolute returns is the absolute (non-annualized) profit or loss from the date of IPO listing till date.
• Annualized return is the return extrapolated to a per annum basis.

Here’s the low down:
Companies with IPO Rating of 1, 2 and No Rating
• Out of the 64 companies which had an IPO in 2010, 25 companies had a rating of 1 or 2 (including 2 which did not have a rating).
• From the previous point, it can be implied that 39% of last year’s IPOs were of companies with weak financial status / fundamentals
o Out of these 25, only 7 have a positive return till date (28% of the weak companies gave a positive return till date)
o 2 IPOs gave returns in the range of 0 to 10% profit
o Remaining 5 (out of the 7 IPOs with positive returns) gave above 10% (2 IPOs in fact have more than 30% profit)
o Negative absolute return range is from -22% to -80%

Companies with IPO Rating of 3
• Another 21 companies out of 64 had an IPO rating of 3 (33% of all IPOs last year had average financials)
o 6 IPOs have positive returns
  - 5 of the 6 have returns in excess of 75% absolute returns
  - The same 5 have an annualized returns of 77% (pa) as the lowest and 298% (pa) as the highest
- Out of these 5 super performers 3 companies have been listed for less than a year
o Remaining 15 IPOs had negative absolute returns ranging from -12% to -93%.
- Out of these 15 IPOs, 7 companies (with negative returns) have been listed for over an year on the stock markets.
o Negative absolute return range is from -12% to -93%

Companies with IPO Ratings of 4 and 5
• Finally, 18 IPOs had a rating or 4 or 5 (28% of all IPOs last year had strong financials)
o Only 2 had a rating of 5 – (Coal India and MOIL)
o Coal India’s absolute return is 54.57% (annualized 110.66%)
o MOIL’s absolute return is 0.97% (annualized 2.56%)
o 5 IPOs (including Coal India and MOIL) have a positive return
o 13 IPOs absolute return ranges from -3% to -55%

Summary
• Only 18 out of 64 IPOs gave positive returns; that’s a dismal 28% success rate of making any profit through IPOs
• 15 out of 64 IPOs gave a positive return more than the return on a fixed deposit (FD rate assumed as 8% pa)
• 8 out of 64 IPOs gave absolute returns of more than 50%; that’s a success rate of 1 in 10
• IPO ratings are only indicators so DO NOT invest in IPOs based on ratings
• Set your profit margins when you invest in IPOs; 10% absolute returns on listing is a safe bet
• Book your profits as soon as you hit your profit margins; preferably take out you capital and leave the profit in shares
• Always invest on the last day of the IPO
• Look at the subscription levels before you decide to invest in an IPO
• Set stop loss levels and exit stocks before you lose out most of your capital
• Don’t be in love with your investments in IPOs
o Don’t be too greedy for more profits
o Don’t wait for a share to come back to its cost price to exit; cut your losses
• Hindsight is always 20 / 20
o Murphy’s Law works; shares will always move up after you sell and always fall after you buy
• It’s better to pay 15% as tax on ‘short term capital gains’ than 20% (or 30%) as tax on interest from FDs. Hence, a 10% absolute return in an IPO is better than a 10% pa return on a FD.

Disclaimer: The views given above are my own and care has been taken to be as accurate as possible in representation of facts, figures and interpretations.

Stock Price Sources: BSE, NSE