Coal India Rating ‘Buy’: Share buyback plan in the works

Recent media reports (Financial Express) suggest that the Government of India (GoI), as a part of its disinvestment programme for FY19, is finalising a share buyback plan by Coal India (CIL).

Analysis/Implications—Outlay for a share buyback in FY19 would be capped at Rs 29.2 bn (1.6-1.7% of equity shares outstanding assuming buyback price is in the range of Rs 275-300/share)

Previously, CIL had completed a share buyback programme in October, 2016 wherein 108.96 mn shares (1.72% of outstanding equity share capital at that time) were bought back via a tender offer at a price of `335/share.

We understand that according to the rules, the size of a share buyback by a company cannot exceed 25% of the aggregate fully paid-up share capital and free reserves as per its latest audited accounts. Further, the buyback is typically subject to approvals by shareholders and other statutory authorities.

As of FY18, CIL’s stand-alone fully paid-up share capital plus free reserves (i.e., net worth less capital redemption reserve) stood at `116.8 bn, implying that the outlay for any share buyback this year would be capped at `29.2 bn (`4.7/share). Accordingly, assuming a share buyback price in the range of `275-300/share (1-10% above 18-Sep closing price), the maximum size of the buyback could be 1.6-1.7% of outstanding equity shares (6.2 billion currently).

As of June 2018, GoI’s holding in CIL was 78.32%. If all shareholders were to tender their shares for any such buyback, i.e., buyback is as per proportionate holding, GoI would receive `22.9 bn from the buyback.

Notwithstanding a share buyback, we believe that a healthy interim dividend in Q4FY19F and GoI disinvestment via an offer for sale (OFS) within the next 12 months look reasonably probable.

Maintain Buy; stock trades at 4.5x FY20F adjusted EV/Ebitda: On our FY20F adjusted earnings (adding back OB removal provisioning to EPS and Ebitda), the stock trades at 7.7x P/E (EPS: `30.4) and 4.5x EV/Ebitda (9.2x P/E and 5.0x EV/Ebitda on reported earnings); on our FY19F dividend of `23/share, the stock offers a yield of 8.4%. Our target price of `320 implies 17% potential upside. We maintain our Buy rating on the stock.

Coal India Ltd