Coal India OFS: Should retail investors subscribe to the PSU stake sale? Here's what analysts say

Coal India's two-day offer for sale (OFS) kicked off for subscription on Thursday as the government is likely to raise about Rs 4,200 crore via the offer by offloading 18.48 crore equity shares or a 3 per cent stake in the state-run coal miner. The offer price for the issue has been fixed at Rs 225, a discount of 7 per cent from its previous close at Rs 241.2.

The government has proposed to sell up to 9.24 crore shares, representing 1.50 per cent of the total paid-up equity as a base offer with an option to additionally sell 9.24 crore shares or 1.5 per cent as a green shoe option in the event of oversubscription.

While the non-retailers bid for the OFS on Thursday, the retail investors can subscribe to the issue on Friday, June 2. Retailers have a 10 per cent offer reserved for them. Despite the sudden correction of 5 per cent in the shares of Coal India, analysts believe that one should subscribe to the OFS. The consensus target of analysts suggests a descent of up to a 60 per cent upside.

The outlook for Coal India in FY24 appears bullish, primarily driven by robust power demand in India, supported by the growth of the manufacturing sector and rural electrification initiatives. Given positive sentiment towards the entire PSU space, any dips resulting from news about OFS as attractive buying opportunities, said Santosh Meena, Head of Research at Swastika Investmart.

"We recommend investors 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 Rs 275. By taking advantage of this offering and carefully assessing the risk-reward dynamics, investors can potentially benefit from the expected positive momentum in Coal India," he said.

Recently, Coal India has announced to increase in prices for its high-grade (G2 to G10) non-coking coal by 8 per cent with effect from May 31 even as they do not see more such increases in the near term, considering the inflationary environment and upcoming elections. A majority of the brokerage firms gave the stock a thumbs up after the stock.

Announcing a price increase of 8 per cent, Coal India has chosen a pragmatic path. We believe it may consider lifting prices for G11-plus after the general election in CY24. We had earlier factored in a 6 per cent price hike in FY25E. Given the price hike now, we raise FY24E EBITDA by 7 per cent, keeping FY25E flat, said Nuvama Institutional Equities with a 'buy' tag and a target price of Rs 365.

Coal India is trading at 3.9 times our FY24E EV/EBITDA and 2.2 times our FY24E P/B. The demand for power is expected to increase, consequently driving the requirement for higher coal volumes by power plants, said Motilal Oswal's report, which has a 'buy' rating on the stock with a target price of Rs 290.

However, ICICI Securities has an 'add' rating on the stock with a target price of Rs 280, suggesting an upside of 22 per cent. "The benefit of Rs 2,703 crore would partially mitigate the impact of the wage hike. Also, the price hike is unlikely to impact the economics of most power plants, which generally take lower-grade coal," said the brokerage.


(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Business Today)

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