Coal India IPO - How Will Markets Compare Coal India's Management with Those of Other Heavyweights?

With ICRA too rating Coal India's IPO at 5/5 indicating strong fundamentals, after CRISIL which gave a similar rating, the next question is how the capital markets would assess Coal India's management, which is a crucial factor not only during the IPO, but even after listing.

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The bull run is on once again, but this time around, a vital difference is striking. While index heavyweight Infosys (BSE: 500209, NSE: INFOSYSTCH) is scaling all-time highs, the even heavier heavyweight Reliance Industries (BSE: 500325, NSE: RELIANCE) is hovering near 52-Week lows. Though many reasons can be attributed for this difference, one among them is quite apparent.

Post Dhirubhai’s demise and the split of the group into two, RIL can only project Mukesh Ambani as the leadership, and that is something capital markets are not fully comfortable with.

On the other hand, at Infosys, one of the co-founders Ashok Arora has deserted it long back, NS Raghavan has retired after peaking out as MD many years back, Nandan Nilekani has moved on to Government, and even NR Narayana Murthy is nowadays in a sort of non-executive role, and even that is going to end soon. Still, this IT juggernaut rolls on, gathering momentum. The secret is nothing but the distributed leadership structure, that continues to groom and churn out leaders like Kris Gopalakrishnan, SD Shibulal, & K Dinesh.

This is the kind of leadership factory that capital markets bet on long-term, and this is what transformed a mere Rs. 12,500 (a typical bid amount) with Infosys IPO in 1994 to Rs. 3.5 crore (that investment’s current market value) in 2010.

Now when the nation waits hopefully for its largest IPO ever, two things are certain. One, Coal India won’t require somebody to bail it out, like how Morgan Stanley helped Infosys in 94.

Secondly, Coal India has created over the decades a leadership structure that is unparalleled in the country, if not in the world. Coal India is an organization with 45 executive directors, 8 of them having the role of CMDs. In fact Coal India is not really a company, but a conglomerate. A conglomerate of one holding company - CIL - and eight subsidiaries. Six of them are Mini Ratnas, with CIL itself all set to be a Maha Ratna post-listing.

The width, depth, maturity, and empowerment of this distributed leadership is evident from the fact that despite being employee-heavy, despite missing out on the best quality coal, and despite being burdened with the need to accommodate subsidies, Coal India has upstaged global majors to be the largest and the most profitable coal producer in the world.

Almost never has Coal India felt the need to look outside for leaders, and leadership transitions can’t be smoother elsewhere. CIL Chairman Partha S Bhattacharyya sums it up nicely when he says, “Going forward, there are enough excellent choices to choose for all leadership positions, including the post of CIL Chairman.”

Coal India IPO - 10 Questions Investors will Ask

As the investing world waits for India to deliver the world’s third-largest and the country’s largest ever IPO in October, there are several questions investors are likely to ask before committing their money, if not for the simple reason that Indian capital markets are in tremendous momentum and here is a mega IPO that can affect the markets positively or negatively. How does Coal India fare in these core questions? Seasonal Magazine finds out.

Is Coal India’s Business Model Robust?

Coal India is the world’s largest producer of Coal, thanks to being born in Coal Country, India, and thanks to the head-start it enjoyed as the sole PSU in this sector. Despite being India’s largest employer, its operating costs are much lower than almost all coal majors, including those in China. At the same time, it services the second-largest coal demand in this whole world, India’s power sector. Together, this has resulted in a robust business model, seldom seen elsewhere in any sector or country.

ALSO READ: Coal India IPO - Assessing Coal India's Management Expertise
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Is the Issue Supported by Wall Street & Dalal Street?

If Coal India created history, when international banking giants vied with each other to underwrite its IPO for next to nothing, it is again going to surprise by way of support from international institutional investors. The idea of having 30% reserved for anchor investors is already being scrapped, as the international road-shows progress, and the underwriting institutions are themselves busy readying funds and formalities to subscribe to the issue. The IPO is supported by Wall Street majors like Citi, Deutsche Bank, BofA - Merrill Lynch, & Morgan Stanley, as well as Dalal Street biggies like Enam & Kotak.

How Strong is Coal India’s Competition?

Technically, Coal India is not a monopoly. Many private sector players today have captive coal fields for their own use. But Coal India and its myriad subsidiaries virtually control the bulk of this business, if not for anything else, for the simple reason that nobody else is equipped to cater to the huge Indian demand. For many many years, if not decades, Coal India is not expected to have any serious competition.

What Kind of a Rating will Coal India IPO Have?

Coal India has garnered its first IPO rating, a 5/5 from CRISIL, which goes even one step above the ‘above average fundamentals’, which in itself is rare in this country. In fact, the only challenges CRISIL found in Coal India’s strategy are efficient use of their cash reserves and how the main promoter (who will hold 90% post-issue) will act by way of enacting new coal regulations. Those are the kind of drawbacks many PSUs would love to have! More solid ratings from more assessors are expected for this IPO in the coming days.

Is the Issue Size Enough to Accommodate FIIs, DIIs, Retail Investors?

If Coal India IPO was just India’s biggest, many would have been happy. Because, all interested retail investors would be able to hold a pie of this. But Coal India is also reportedly world’s third largest IPO. That means all interested investors will be comfortably accommodated - FIIs, DIIs, retail investors, pension funds, everyone.

Is Coal India IPO’s Valuation Exorbitant?

Being a public sector company, nobody expects Coal India to be exorbitantly priced like private sector IPOs, despite being in the high-buzz energy sector. Whatever heavy pricing Government had resorted to earlier is likely to be missing as such IPOs like NHPC & SJVN had failed to appreciate much. More likely for Coal India will be how Engineers India FPO was finally priced, or even better. On reasonable P/E and P/BV, both the Government and potential investors are all set to gain.

How Efficient is Coal India’s Management?

Chairman Partha S Bhattacharyya understands both the science and commerce of coal. A physics postgraduate and an ICWA Fellow, Bhattacharyya has clearly applied superb strategy over the years leading to this IPO, to convert this once loss-making complex of subsidiaries into a strong network of coal mining operations. His secrets include a concern for the labour force which can be seen from the largest ESOP, his concern for making Coal India a highly-profitable organisation, and his concern for the environment.

Can Coal India Address the International Market Ever?

Coal India’s story so far is Indian. But this is going to change soon as Coal India starts to get results from the next-gen washing process that will enable Coal India to deliver international quality coal. Combine this with Coal India’s expertise in delivering the most competitive pricing, and you see the international story starting to appear in the horizon. Talks are already on to take stakes in international mines.

Is Coal India IPO Suitable for Long Term Investors?

There are chances that Coal India will be one of those issues fit for the invest n’ forget philosophy, much like Reliance Industries or Infosys. The demand story and the growth story of Coal India is akin to the best in Indian industry, with the demand insatiable and the growth relentless. Such factors make Coal India one of those rare IPOs that can be massive wealth creators over two, five, ten, or fifteen years down the lane.

Is Coal India IPO Likely to Give Listing Gains?

If you are looking for short-term gains too, Coal India comes across as a strong case. If not for anything else, the above nine factors will ensure that Coal India will set new records in over-subscription, paving the way for significant listing gains. But, more seriously speaking, Coal India’s attractive valuation will leave enough money on the table for many weeks, months, and quarters to come, and make it a heavily traded scrip fit for Nifty and Sensex.

Musli Power X-Tra Eyes Overseas Markets, Ten Fold Growth

After bagging key Indian patent for Musli Power X-Tra, Kunnath Pharma is focussing on mega sports promotion initiatives at an investment of Rs. 100 crore plus, to power ten-fold growth this year and strengthening overseas sales.

Patent No. 241602 is for an ayurvedic performance enhancing drug. Issued by Government of India’s Patent Office to KC Abraham, will it be enough to take his company to the next level, we asked him directly.

“This is the first in a string of patents we would be aiming for Musli Power X-Tra in different countries. This is an important step for us, as we don’t want unhealthy competitors for this product which is an invention of mine,” says this patentee.

Patents are, of course, for inventions, and the current patent to Abraham is for inventing this ‘herbal formulation used as a health restorative and to treat sexual dysfunction.’ The patent legally protects Musli Power X-Tra’s maker Kunnath Pharmaceuticals from anybody copying the formulation for 20 years.

Kunnath Pharmaceuticals which already does brisk business is, however, aiming for a ten-fold jump to Rs. 400 to Rs. 500 crore, this year.

Powering this growth is Abraham’s penchant for sports promotion, having come from a family that contributed an Olympian to the nation. (KC Abraham is the brother of India’s former Olympian Rosakutty).

Explaining the business logic behind, Abraham says, “Musli Power X-Tra is a performance enhancing drug. We started off with smaller sports sponsorships and endorsements, and are now entering the big league.”

He surprised the nation’s football scene recently when he announced an investment of Rs. 100 crore to start a national football academy. This shot went a lot longer than the conventional volleys corporates do by way of sponsoring teams and stars.

Says Abraham, “All the expenses of the 60 selected boys will be taken care of and their only agenda will be to play football. We will reward them handsomely as they progress and they will be paid an unbelievable amount of money for just playing football. My aim is that my boys will win the World Cup in 2018 and it is for that I am spending Rs. 100 crore.”

To give the initiative a jumpstart, Abraham is taking over Viva Kerala soccer club. Earlier, Kunnath had sponsored Goa’s Churchill Brothers.

Abraham is not restricting his sports promotion to just soccer, and is sponsoring Sri Lanka’s Wayamba Elevens for the Champions League T20 Tournament in South Africa. And the diligent entrepreneur he is, Abraham will personally visit Johannesburg to oversee how the initiative pans out. Sri Lanka is an emerging market of importance for Musli Power X-Tra.

Musli Power X-Tra is also a sponsor of the upcoming Commonwealth Games in New Delhi. “Both events would be fruitful for us, reflecting our emerging focus on international markets, concludes Abraham, standing up from a long chat in his corporate office in Kochi, and off to start his next meeting with organizers of another sporting event who have come for discussions.

FUTURE VENTURES IPO - Will History Haunt Future?

Riding on the momentum of India’s consumption-led retail success, Kishore Biyani led Pantaloon / Future conglomerate is tapping the markets for a third time. But prudent investors are sure to take a hard look at the Group’s capital markets history while assessing Future Ventures’ IPO.

Since its IPO in 1991-92, Pantaloon Retail (BSE: 523574, NSE: PANTALOONR) has a history of losing money for many investors, floating around as a pennystock in single digits for the better part of six long years from 92-93 to 98-99, trading even as low as Rs. 1.50.

The Group’s second listed firm, Future Capital Holdings (BSE: 532938, NSE: FCH), has a shorter capital markets history of barely three years, but not much less of a rollercoaster ride for investors than Pantaloon. From highs of Rs. 1044 in FY’08, FCH had tumbled to Rs. 93 by the next fiscal.

But in a way all that is history, as Pantaloon Retail now has a year-to-date price performance of around 60%, while FCH has a six-month price-performance of around 40%. But whether the history of serious setbacks can be forgotten, is a question to be answered by investors who burnt their fingers in these stocks.

There is also another difference. If the earlier value proposition was “Invest in the Retail King”, the current will be “Invest with the Retail King”, as the now planned IPO is for a venture capital fund that will invest in other companies as well as Future Group companies.

Interestingly, the Issue size has come down to Rs. 750 crore from Rs. 3730 crore, the amount Future Ventures unsuccessfully tried to raise in 2008 before the crash.

Now all eyes will be on whether the Group will expect stratospheric valuations too like Pantaloon that trades at 57 P/E and FCH that trades at a price-earnings of 88, which makes them fit candidates for a significant correction if smart money again takes a sojourn from India as in 2008.

Manappuram’s Gold Loan Business - Risky or Rewarding?

The problem Manappuram (BSE: 531213, NSE: MANAPPURAM) faces is that many analysts don’t understand the dynamics of gold loan business, which is only well-understood in India’s southern states. Together with it comes the doomsday predictions of gold reversing to a bearish trend, and how it would affect the fortunes of India’s only listed gold loan company. At the same time, gold continues to make new highs, and riding on the response from a mega campaign to promote the cost-effectiveness, convenience, flexibility, & safety of gold loans, Manappuram Group is all set to double its loan book this fiscal and again in next fiscal. Powering the rapid growth will be a Rs. 1200 crore QIP that will be backed by Citi, UBS, Enam, & Religare, and likely to witness US based PE funds who exited the stock with 5X returns re-entering the company as anchor investors. The Manappuram scrip continues to make new 52-Week Highs, with the latest being today's Rs. 136 in BSE during morning trade. Manappuram Group Chairman VP Nandakumar answers Seasonal Magazine’s queries regarding the difference in perceptions and realities when it comes to gold loans.

Also Read on Manappuram:
Manappuram at All Time High - How to Invest Here Now?
Manappuram Improves Further on Higher Growth, Lower Expenses
Manappuram’s Gold Loan Business - Risky or Rewarding?
Manappuram - Overrated or Underrated?  
Can Manappuram Keep Growing at 60%?

 

If you look at the NBFC sector today, four businesses are booming viz. microfinance, housing finance, gold loans, and of course, the fourth is the prospects in starting banking operations. Though Manappuram is only involved in gold loans, you have been involved with each of these sectors as a co-promoter in certain companies and as a former banker too. How do you asses the potentialities of each?

As you have rightly pointed out, these are NBFC sectors that are booming, and I would also add auto finance into it. If you assess each of them, there is no doubt microfinance is in momentum, and I would say it is fully deserved if you take into consideration the good work they do. Still, the risks are high and we should carefully watch how this pans out in the long run. Housing finance, again is booming, and for a housing finance company it is a good thing that each of their accounts will stay with them for 15 or 20 years. However, there is a flipside too in that profit generation is a long-drawn process. Gold loans on the other hand is a very dynamic business with immense possibilities as not only are the risks negligibly small, but also the ticket-sizes and repayment periods are small, making them suitable for a wider customer base. That is why you hear about so many NBFCs / Banks planning to enter gold loans, even if they don’t eventually due to a lack of core competency in this line.

What about NBFCs considering conversion into banks?


Here the question is different as banks have a dynamics of their own which is not comparable with NBFCs. There are upsides like access to low-cost funds, but what I am wary about is losing one’s core competence. Today, if you look at any successful NBFC, be it Shriram Transport or Manappuram, what works is the sharp focus on a single business on which the organization has built up a formidable core competence. So, if there is a way to get converted into a bank without losing one’s core competence, that is well and good. In fact, an earlier proposal to encourage specialized banks like auto loan banks or housing loan banks or gold loan banks was a good proposal, we think. It is the norm in many countries.

Since the announcement of your preferential issue of Rs. 100 crore, the Manappuram scrip has zoomed. Now, going forward, do you subscribe to the view that for NBFCs, market cap can continue to move in tandem with assets under management?

The preferential issue by promoters was taken well by the market as being done at almost all-time high levels, it conveyed the message that we were fully confident of our growth projections. When this happens to a currently underrated scrip, the prices can correct, and that is all that happened. Coming to your second question, well, this AUM / market cap co-relation has been exhibited in the past by some strong NBFCs including Manappuram. I shouldn’t say whether this will continue to be so in our case, but one thing is sure, we will be reaching our annual AUM target by the second quarter itself, and that means we will hopefully double our loan-book by the end of this fiscal.

You have indicated plans for a QIP which we learn is going to be on a larger scale than you have attempted before. Can you provide more details, as also the dilution it will involve?


We are planning for a Rs. 1000 - 1200 crore QIP so that our capital adequacy ratio will remain comfortable even if we double our loan book. It is planned on a larger scale, supported by Enam & Religare, as also international majors like Citi & UBS. You will be surprised to know that even some international PE funds who exited Manappuram with 5X profits have shown interest to come back through this QIP as anchor investors. The dilution won’t be much, likely to be around only 20%, and weighed against our growth it should be a non-issue.

Gold loan companies tend to perform well in downturns, and plateau during periods of economic growth. Now, as the country is in an economic recovery, do you foresee a slowdown for Manappuram?


Not at all. In fact this idea that gold loans is a downturn business is a misnomer. Many loans tend to do better in downturns and gold loans is no exception. But the reverse is not true for gold loans. This business thrives amidst economic recovery and amidst strong growth phases. The reason for this is simple. Today, if you look at Manappuram’s customer base, around 52% is made up of small & micro enterprises. They expand their businesses seasonally - one small example being the school reopening period - as also when there is strong economic growth.

That brings us to Manappuram’s new ad campaign with celebrity endorsements. How far is it delivering - quantitatively and qualitatively?


It is delivering quite good, but that is not the crux of the issue. Our objective in that campaign is to educate the customer regarding the flexibility, convenience, & cost-effectiveness of gold loans as against other kinds of personal and business loans. In other words, the stigma associated with gold loans should stop. As you can see, we are focussing on growing and professionalising the gold loan segment through this campaign, and not only looking at our own returns. I think we are all set to succeed in bringing respectability to this segment.

When you say growing the gold loan segment, you know it is a long-drawn process. What about immediate returns?


I would say you cannot segregate it as long-term and short-term objectives. But as you say, immediate gains are also quite there. The current gold loan segment is not small as such. Some 2000 tons of gold have been pledged in this country, of which banks account for only 400 tons, and the organized sector including us accounting for another 100 tons approximately. But what about the remaining 1500 tons? That lies with the unorganized sector where you can’t expect proper documentation or security, let alone reasonable interest rates. So, when you convey the message that here is a fully professional gold loan operation with safety and reliability, customers are likely to be converted. We have a Rs. 4000 crore loan book on 35 tons of gold, and so you can imagine the potential when we tap into this 1500 tons in the unorganized sector. That is the short-term potential we are aiming from this campaign. The long-term prospects are mind-boggling - the household gold reserves is 20,000 tons, that is ten times the currently pledged gold.

How do you assess the risks to this business from gold thefts?

Such instances are a miniscule percentage compared with the kind of gold we handle, and even then we are fully insured so that neither the borrowers, investors, or the company is affected. And our experience is that the stolen gold is often recovered by the prompt action of the authorities.

On a personal capacity, you have also entered the gold retailing business. What are the strategies here?

First and foremost, Manappuram is selling only 100% BIS Hallmarked gold. This is quite unlike other jewellers who advertise hallmarked gold, and push non-hallmarked 91.6 gold in the showrooms, ostensibly for offering better prices. On our side, we have taken up the challenge to offer hallmarked 91.6 gold at non-hallmarked price points from other jewellers. Secondly, we do fully transparent accounting, with payment of 100% applicable taxes. We also offer free insurance against theft for gold purchased from Manappuram.

Do you think you can storm the gold retailing bastions as much as you have been successful in outperforming family-run gold loan companies?


I am more than confident, because we will not be targeting the customer segments of other branded jewellery chains, which is largely made up of HNIs. Our target population would be the volume segments for whom gold is also an investment or enabler, and as such, purity and price are of utmost importance. Our shops won’t be mega or large format ones, but more accessible to local communities. We have done an India-wide study on the subject and found out that the volume segment still buys from smaller shops, goldsmiths, and jeweller cum pawn shop setups. We are aiming to be the volume leader and will have to our credit redefining gold purity and price transparency standards.

OBEROI REALTY IPO - Will Oberoi’s Daring Prove Risky for Investors?

Even bigger players like EmaarMGF & Lodha are waiting on the sidelines unwilling to take the IPO plunge, learning from the recent lessons of Nitesh & Jaypee.

But Oberoi Realty has identified that the market sentiment is better, which even while being true for the main indices, doesn’t apply to the realty index at all, which continues to be risky, having lost another 10% since the beginning of this year.

Despite being a developer based in Mumbai known for its high profitability for developers, many of Oberoi’s properties are charged at only around Rs. 11,000 per sq ft, due to being in suburbs like Goregaon.

However, Oberoi is banking on some differentiating strengths like its low debt levels and low land holdings, which has resulted in an above-average IPO rating.

But according to some recent unconfirmed reports the Group’s pre-IPO valuation has suffered since the original IPO announcement, having reportedly halved from Rs. 14,000 crore to Rs. 7000 crore. A query sent to Vikas Oberoi to ascertain this did not elicit a response.

This may affect the book value of the share as well as force the promoters to part with a bigger stake to collect the Rs. 1000 to Rs. 1500 crore eyed.

But all eyes will be on the offer’s price-to-earnings ratio. If Oberoi is willing to offer at a reasonable P/E between 15 to 20, there is a good chance of investors warming up to it. But P/E multiples in the 20s and 30s would be a tough call for Oberoi.

Clarification on this was not received from Oberoi Realty at the time of publishing.