Coal India: Diwali gift for retail investors, says Udayan

Here is a transcript of Udayan Mukherjee’s comments on CNBC-TV18. Also watch the accompanying video.

The listing should be good—more than Rs 280 is what the grey market is indicating and post that the key thing to map is demand/supply for Coal India. Retail makes money—does retail sell? HNI start making money as well above Rs 270, so all those people are making profits. Leveraged HNIs will sell a bit—I don’t know how much of retail selling you expect because of them sitting on profits and the selling which comes in because positions are profitable on Coal India has to be neutralised by the institutional buyers. There the equation is quite favourable because no institution got more than 5% of what it bid for and if you want a reasonable chunk of Coal India in your portfolio then you have to top-up your IPO allotment from the secondary market and that will probably soak up a lot of the supply.

So what is more? Is the HNI/retail supply more or the demand from institutions more today? The demand from institutions is probably going to be more and therefore the stock may not correct meaningfully. You might see volatile trade between Rs 275 and Rs 290—give or take Rs 5-10 either side—you will probably see those swings—but the magic figure is Rs 300. Can we see Rs 300 on Coal India because optically that will light up the screen and I am hoping that at some point we do touch that level if not for starters.

On fair value

It should be close to Rs 300—I know some people would disagree—but there is so much of calculation which has happened around Coal India, you don’t want to go too much more into it because it is probably the stock, which has got the maximum amount of attention in the last two-three weeks or last one month but you work with simple numbers for simple minded people. Next year most of the top brokerages are talking about an earnings per share of close to Rs 20, that is FY12, and we should be looking at FY12 now sitting in November 2010. So Rs 20 at Rs 300 is 15 times.

Is Rs 15 P/E justified for Coal India?—I think there has been a lot of debate about how it should not be treated as a pure commodity stock or coal stock but as a quasi utility stock because of the nature of its earnings and how it is panned out. So I think if you arrive at some compromise, a little of coal commodity company plus valuation, little discount to utility companies and I think you can give it 15 times 2012. By the way that would be trading at about under eight times EV/EBITDA for 2012 at Rs 300 and that also is quite acceptable given how coal companies are valued across the world.

You can justify a price of Rs 290-300 on Coal India. It would not be outlandish if we landed up at that kind of value. So what should retail do if you do see those kind of levels? I think if we do—I don’t know whether we will see Rs 300 today—then I think from there to justify a huge amount of upside just in the near-term seems like a bit of a stretch. It can happen, as institutions buy, but Rs 350-400 those kinds of levels on Coal India would seem a little exuberant. So above Rs 300—retail got at Rs 233—you are making nearly Rs 70, you might consider selling once and take your profits. But remember the experience if you do that that you made money in stocks and that experience should try and get you back into the market. I don’t think it would be fair if you made money and then forgot about the Indian stock market after that.