Nomura

The government is reportedly planning to raise R20,000 crore ($3.7 billion) by disinvesting 10% stake in Coal India (CIL) via a 5% sale to the public (i.e., secondary offering) and a 5% sale to the company (i.e., buyback), given CIL?s $12-billion cash chest. The ministry of coal has been asked to take CIL?s workers? unions into confidence and gather support for the share sale; the unions were assured at the time of CIL?s IPO in 2010 that there would be no further disinvestment. Coal secretary SK Srivastava was quoted as saying ?we anticipate some labour issues and we will do our best to take them into confidence?.

In our view, prospects of a potential 10% disinvestment in CIL via a secondary offering (OFS) has been an overhang on the stock since the government pegged its FY14 disinvestment target at R40,000 crore in the Union Budget. Further, the overhang has been exaggerated in the backdrop of NTPC?s stock price correction between the government announcing its intent to divest stake in the company (November 2012) and the actual stake sale (February 2013).

Accordingly, relative to expectations, the government?s proposal to disinvest 5% stake via the buyback mechanism and only 5% via an OFS is a positive surprise, in our view. CIL?s workers? unions would need to be on board for any move by the government to lower its stake in CIL, particularly via an OFS, to materialise. Prima facie, if the draft proposal is implemented, a buyback would potentially precede the OFS.

We believe that when there is an OFS around the corner, it would likely be preceded by a hike in price of notified coal to boost CIL?s operating margin (which is under pressure) and, in turn, secure a better offering price.

A 5% share buyback by CIL at its CMP (R311/share) would entail a cash outgo of R10,000 crore ($1.8bn); ceteris paribus, our FY14F/15F normalised EPS (base case) may rise by 3.6%/2.8%. On normalised earnings (pre-overburden removal Ebitda and PAT, excluding a potential incidence of 26% mining tax), the stock trades at FY14F 9.6x P/E, 5.2x EV/EBITDA. Maintain ?buy?.