Coal India OFS: What should investors do?

Analysts say that a decline in the price of Coal India is a good buying opportunity. They consider Coal India as a stable play, mainly because of the robust power demand in India, and rural electrification initiatives. The OFS will be open for retail and non-retail investors on June 1 and 2

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With the government looking to offload stake in Coal India, the stock slumped 5 percent, making it the worst performer among the Nifty50 pack on June 1.

The government has proposed to offload a 3 percent stake in Coal India through an offer for sale (OFS), with a floor price of Rs 225 per share – a discount of 6.7 percent to the closing price on May 31. The size of the OFS is around Rs 4,000 crore.

Analysts say that any decline in the share price of Coal India is a good buying opportunity. They consider Coal India as a stable play, mainly because of the robust power demand in India, the growth of the manufacturing sector and rural electrification initiatives.

The OFS will be open for retail and non-retail investors on June 1 and 2. The proposal is to offload 9.24 crore shares, amounting to a stake of 1.5 percent in the coal producer. Besides, there will be a green shoe option for selling an equal amount of stake in case of oversubscription.

Around 70-75 percent of the total power generation in India is through the thermal route and 80-85 percent of the total coal production is supplied to the power sector.

Coal India is the largest supplier of thermal coal to power sectors, with 75-80 percent of fuel requirements being met by the coal major.

Further, demand for coal is seen rising on the back of enhanced power demand for rural electrification.

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What do analysts say

Any technical dip resulting from the OFS news is seen as an attractive buying opportunity, according to Santosh Meena, Head of Research, Swastika Investmart.

“We recommend investors to consider participating in this OFS as we believe the downside risk is limited around the Rs 225 level. On the upside, we see a potential target level of 275,” he added.

Gaurav Bissa, Vice President, Incred Capital, told Moneycontrol that Coal India had given a breakout around the Rs 205-207 level, and a higher top, higher bottom formation is seen on the weekly chart, which is a positive sign.

He believes if the stock falls up to Rs 220-225, one could look at buying it, with a stop loss at Rs 205. Bissa sees the stock rallying up to Rs 245-250. “We believe COAL (Coal India) is well placed to capitalise on the growth opportunity ahead,” said Motilal Oswal Financial Services.

It added that Coal India is trading at 3.9 times its FY24 EV/EBITDA and 2.2 times its FY24 Price to book.

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The brokerage firm also believes that the demand for power will increase, consequently driving the requirement for higher coal volumes by power plants.

The state-owned coal major has hiked prices of its high-grade G2-G10 non-coking coal, with effect from May 31, 2023, by 8 percent. This is expected to realise an incremental revenue of Rs 2,700 crore in FY24.

Motilal Oswal Financial Services sees this price hike positively impacting 30 percent of the volumes and would help Coal India partially offset the cost increases, especially the wage bill.

Besides, the price hike comes at a 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.

Taking cognisance of the revised prices, the domestic brokerage firm has hiked its EPS estimate for FY24 and FY25 by Rs 3.5 and Rs 4, respectively. “We believe some of the incremental earnings would be distributed as dividend further sweetening the 9 percent expected dividend yield for FY24/FY25,” it said.

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