1.

1INTRODUCTION
The first public offering of equity shares or convertible securities by a company, which is followed by the listing of a companys shares on a stock exchange, is known as an Initial Public Offering. In other words, it refers to the first sale of a companys common shares to investors on a public stock exchange, with an intention to raise new capital. The most important objective of an IPO is to raise capital for the company. It helps a company to tap a wide range of investors who would provide large volumes of capital to the company for future growth and development. A company going for an IPO stands to make a lot of money from the sale of its shares which it tries to anticipate how to use for further expansion and development. The company is not required to repay the capital and the new shareholders get a right to future profits distributed by the company. Companies fall into two broad categories: Private and Public. A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. When a privately held corporation needs additional capital, it can borrow cash or sell stock to raise needed funds. Often "going public" is the best choice for a growing business. Compared to the costs of borrowing large sums of money for ten years or more, the costs of an initial public offering are small. The capital raised never has to be repaid. When a company sells its stock publicly, there is also the possibility for appreciation of the share price due to market factors not directly related to the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of jurisdiction such as Indian Companies Act 1956. It usually isn't possible to buy shares in a private company. One can approach the owners about investing, but they're not obligated to

sell anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public."

1.2 NEED FOR THE STUDY

There was a steady growth in the primary market and more investors are participating in the primary market.

The purpose of the study is to know about IPOs and how they work. To know how to enter into IPOs and know about the market intermediaries.

1.3 SCOPE OF THE STUDY

The scope of the study covers only issues through N.S.E. The study consists of only IPOs.

1.4 OBJECTIVES

To evaluate the performance of the IPOS issued on 18th Oct 2010 of CIL. To analyze the performance of CIL. To study the future values of IPO issued on 18thoct 2010.

1.5 METHODOLOGY:

The data collected for IPOS issued in the year 2010 taken as a Project Instrument. Data has been Collected for companies which opted for IPOS for public in the year 2010 along with Book Running Lead Managers, Opening and Closing dates of IPOS, No of Days Open for IPO. (Difference between opening and closing dates of IPOS issued), issue price, Listing Price etc. and eliminated the companies which are issued Further Public Offers (FPOs) and Public Offers (Pos). Finding the IPO future values using discounting cash flows (DCF) and sensitive analysis.

1.6 SOURCES OF STUDY

Secondary Data: The data is collected from

Magazines Company Prospectus Company Annual Reports Company web site CRISIL - Credit Rating and Information Services of India Ltd Angel Broking Firm

1.7 LIMITATIONS
The data collected is restricted to Coal India Ltd.

This analysis is considered for Retail individual investors and Institutions. Brokerage, taxes and opportunity cost are not considered. Public offers and further public offers are eliminated in the analysis IPO of 2010 is only considered due to time constraint.

2.1 INTRODUCTION OVERVIEW OF INDIAN FINANCIAL MARKETS There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE), which began formal trading in 1875, making it one of the oldest in Asia. Over the last few years, there has been a rapid change in the Indian securities market, especially in the secondary market. Advanced technology and online-based transactions have modernized the stock exchanges. In terms of the number of companies listed and total market capitalization, the Indian equity market is considered large relative to the countrys stage of economic development. The number of listed companies increased from 5,968 in March 1990 to about 10,000 by May 1998 and market capitalization has grown almost 11 times during the same period. The debt market, however, is almost nonexistent in India even though there has been a large volume of Government bonds traded. Banks and financial institutions have been holding a substantial part of these bonds statutory liquidity requirement

The portfolio restrictions on financial institutions statutory liquidity requirement are still in place. A primary auction market for Government securities has been created and a primary dealer system was introduced in 1995. There are six authorized primary dealers. Currently, there are 31 mutual funds, out of which 21 are in the private sector. Mutual funds were opened to the private sector in 1992. Earlier, in 1987, banks were allowed to enter this business, breaking the monopoly of the Unit Trust of India (UTI), which maintains a dominant position. Before 1992, many factors obstructed the expansion of equity trading. Fresh capital issues were controlled through the Capital Issues Control Act. Trading practices were not transparent, and there was a large amount of insider trading. Recognizing the importance of increasing investor protection, several measures were enacted to improve the fairness of the capital market. The Securities and Exchange Board of India (SEBI) was established in 1988. Despite the rules it set, problems continued to exist, including those relating to disclosure criteria, lack of Brokers, capital adequacy, and poor regulation of merchant bankers and underwriters. There have been significant reforms in the regulation of the securities market since 1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted giving SEBI statutory status as an apex regulatory body. And a series of reforms was introduced to improve investor protection, automation of stock trading, integration of national markets, and efficiency of market operations. India has seen a tremendous change in the secondary market for equity. Its equity market will most likely be comparable with the worlds most advanced secondary markets within a year or two. The key ingredients that underlie market quality in Indias equity market are: Exchanges based on open electronic limit order book

 Nationwide integrated market with a large number of informed traders and fluency of short or long positions; and No counterparty risk. Among the processes that have already started and are soon to be fully implemented are electronic settlement trade and exchange-traded derivatives. Before 1995, markets in India used open outcry, a trading process in which traders shouted and hand signaled from within a pit. One major policy initiated by SEBI from 1993 involved the shift of all exchanges to screen-based trading, motivated primarily by the need for greater transparency. The first exchange to be based on an open electronic limit order book was the National Stock Exchange (NSE), which started trading debt instruments in June 1994 and equity in November 1994. In March 1995, BSE shifted from open outcry to a limit order book market. Currently, 17 of Indias stock exchanges have adopted open electronic. 2.2 RECENT DEVELOPMENTS AND POLICY ISSUES. Financial industry did not have equal access to markets and was unable to participate in forming prices, compared with market participants in Mumbai (Bombay). As a result, the prices in markets outside Mumbai were often different from prices in Mumbai. These pricing errors limited order flow to these markets. Explicit nationwide connectivity and implicit movement toward one national market has changed this situation. NSE has established satellite communications which give all trading members of NSE equal access to the market. Similarly, BSE and the Delhi Stock Exchange are both expanding the number of trading terminals located all over the country. The arbitrages are

eliminating pricing discrepancies between markets. Despite these big improvements in microstructure, the Indian capital market has been in decline during the last three years. The amount of capital issued has dropped from the level of its peak year, 1994/95, and so have equity prices. In 1994/95, Rs276 billion was raised in the primary equity market. This figure fell to Rs208 billion in 1995/96 and to Rs142 billion in 1996/97. The BSE-30 index or Sensex, the sensitive index of equity prices, peaked at 4,361 in September 1994 and fell during the following years. A leading cause was that financial irregularities and overvaluations of equity prices in the earlier years had eroded public confidence in corporate shares. Also, there was a reduced inflow of foreign investment after the Mexican and Asian financial crises. In a sense, the market is now undergoing a period of adjustment. Thus, it is time for regulatory authorities to make greater efforts to recover investors confidence and to further improve the efficiency and transparency of market operations. The Indian capital market still faces many challenges if it is to promote more efficient allocation and mobilization of capital in the economy. Firstly, market infrastructure has to be improved as it hinders the efficient flow of information and effective corporate governance. Accounting standards will have to adapt to internationally accept accounting practices. The court system and legal mechanism should be enhanced to better protect small shareholders rights and their capacity to monitor corporate activities. Secondly, the trading system has to be made more transparent. Market information is a crucial public good that should be disclosed or made available to all participants to achieve market efficiency. SEBI should also monitor more closely cases of insider trading.

Thirdly, India may need further integration of the national capital market through consolidation of stock exchanges. The trend all over the world is to consolidate and merge existing stock exchanges. Not all of Indias 22 stock exchanges may be able to justify their existence. There is a pressing need to develop a uniform settlement cycle and common clearing system that will bring an end to unnecessary speculation based on arbitrage opportunities. Fourthly, the payment system has to be improved to better link the banking and securities industries. Indias banking system has yet to come up with good electronic funds transfer (EFT) solutions. EFT is important for problems such as direct payments of dividends through bank accounts, eliminating counterparty risk, and facilitating foreign institutional investment. The capital market cannot thrive alone; it has to be integrated with the other segments of the financial system. The global trend is for the elimination of the traditional wall between banks and the securities market. Securities market development has to be supported by overall macroeconomic and financial sector environments. Further liberalization of interest rates, reduced fiscal deficits, fully market-based issuance of Government securities and a more competitive banking sector will help in the development of a sounder and a more efficient capital market in India. Capital Market Reforms and Developments Reforms in the Capital Market Over the last few years, SEBI has announced several far-reaching reforms to promote the capital market and protect investor interests. Reforms in the secondary market have focused on three main areas: structure and functioning of stock exchanges, automation of trading and post trade systems, and the introduction of surveillance and monitoring systems. Computerized online trading of securities, and setting up of clearing houses or settlement guarantee funds were made compulsory for stock exchanges. Stock exchanges were permitted to expand their trading to locations outside their jurisdiction

through computer terminals. Thus, major stock exchanges in India have started locating computer terminals in far-flung areas, while smaller regional exchanges are planning to consolidate by using centralized trading under a federated structure. Online trading systems have been introduced in almost all stock exchanges. Trading is much more transparent and quicker than in the past. Until the early 1990s, the trading and settlement infrastructure of the Indian capital market was poor. Trading on all stock exchanges was through open outcry, settlement systems were paper-based, and market intermediaries were largely unregulated. The regulatory structure was fragmented and there was neither comprehensive registration nor an apex body of regulation of the securities market. Stock exchanges were run as brokers clubs as their management was largely composed of brokers. There was no prohibition on insider trading, or fraudulent and unfair trade practices. Since 1992, there has been intensified market reform, resulting in a big improvement in securities trading, especially in the secondary market for equity. Most stock exchanges have introduced online trading and set up clearing houses/corporations. A depository has become operational for scrip less trading and the regulatory structure has been overhauled with most of the powers for regulating the capital market vested with SEBI. The Indian capital market has experienced a process of structural transformation with operations conducted to standards equivalent to those in the developed markets. It was opened up for investment by foreign institutional investors (FIIs) in 1992 and Indian companies were allowed to raise resources abroad through Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). The primary and secondary segments of the capital market expanded rapidly, with greater institutionalization and wider participation of individual investors accompanying this growth. However, many problems, including lack of confidence in stock investments, institutional

overlaps, and other governance issues, remain as obstacles to the improvement of Indian capital market efficiency.

2.3 PRIMARY MARKET The first time that a companys shares are issued to the public, it is by a process called the initial public offering (IPO). In an IPO the company offloads a certain percentage of its total shares to the public at a certain price. Most IPOS these days do not have a fixed offer price. Instead they follow a method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page). The public can bid for the shares at any price in the band specified. Once the bids come in, the company evaluates all the bids and decides on an offer price in that range. After the offer price is fixed, the company allots its shares to the people who had applied for its shares or returns them their money. Since 1991/92, the primary market has grown fast as a result of the removal of investment restrictions in the overall economy and a repeal of the restrictions imposed by the Capital Issues Control Act. In 1991/92, Rs62.15 billion was raised in the primary market. This figure rose to Rs276.21 billion in 1994/95. Since 1995/1996, however, smaller amounts have been raised due to the overall downtrend in the market and tighter entry barriers introduced by SEBI for investor protection .SEBI has taken several measures to improve the integrity of the secondary market. Legislative and regulatory changes have facilitated the corporatization of stockbrokers. Capital adequacy norms have been prescribed and are being enforced. A mark-

to-market margin and intraday trading limit have also been imposed. Further, the stock exchanges have put in place circuit breakers, which are applied in times of excessive volatility. The disclosure of short sales and long purchases is now required at the end of the day to reduce price volatility and further enhance the integrity of the secondary market. 2.4 INITIAL PUBLIC OFFERING Initial public offering (IPO), also referred to simply as a "public offering" or "flotation," is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. An IPO can be a risky investment. For the individual investor, it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value. However, in order to make money, calculated risks need to be taken. Reasons for listing: When a company lists its shares on a public exchange, it will almost invariably look to issue additional new shares in order to raise extra capital at the same time. The money paid by

investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of dissolution. The existing shareholders will see their shareholdings diluted as a proportion of the company's shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms. In addition, once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt. This regular ability to raise large amounts of capital from the general market, rather than having to seek and negotiate with individual investors, is a key incentive for many companies seeking. 2.5 PROCEDURE IPOs generally involve one or more investment banks as "underwriters." The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. The sale (that is, the allocation and pricing) of shares in an IPO may take several forms. Common methods include: Best efforts contract Firm commitment contract

All-or-none contract Bought deal Dutch auction Self distribution of stock

In the business of initial public offering, the underwriting contract is the contract between the underwriter and the issuer of the common stock. The following types of underwriting contracts are most common In the firm commitment contract the underwriter guarantees the sale of the issued stock at the agreed-upon price. For the issuer, it is the safest but the most expensive type of the contracts, since the underwriter takes the risk of sale in the best efforts contract the underwriter agrees to sell as many shares as possible at the agreed-upon price. Under the all-or-none contract the underwriter agrees either to sell the entire offering or to cancel the deal. Stand-by underwriting, also known as strict underwriting or old-fashioned underwriting is a form of stock insurance: the issuer contracts the underwriter for the latter to purchase the shares the issuer failed to sell under stockholders subscription and applications. A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold. Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissionsup to 8% in some cases.

Multinational IPOs may have as many as three syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups. Because of the wide array of legal requirements, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City Usually, the offering will include the issuance of new shares, intended to raise new capital, as well the secondary sale of existing shares. However, certain regulatory restrictions and restrictions imposed by the lead underwriter are often placed on the sale of existing shares. Public offerings are primarily sold to institutional investors, but some shares are also allocated to the underwriters' retail investors. A broker selling shares of a public offering to his clients is paid through a sales credit instead of a commission. The client pays no commission to purchase the shares of a public offering; the purchase price simply includes the built-in sales credit. The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the green shoe or over allotment option. The first sale of stock by a private company to the public is IPO. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.

In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. 2.6 PRICING Historically, IPOs both globally and in the United States have been under priced. The effect of "initial under pricing" an IPO is to generate additional interest in the stock when it first becomes publicly traded. Through flipping, this can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, under pricing an IPO results in "money left on the table"lost capital that could have been raised for the company had the stock been offered at a higher price. One great example of all these factors at play was seen with [Link] IPO which helped fuel the IPO mania of the late 90's internet era. Underwritten by Bear Stearns on November 13, 1998 the stock had been priced at $9 per share, and famously jumped 1000% at the opening of trading all the way up to $97, before deflating and closing at $63 after large sell offs from institutions flipping the stock . Although the company did rise about $30 million from the offering it is estimated that with the level of demand for the offering and the volume of trading that took place the company might have left upwards of $200 million on the table. The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value.

Investment banks, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from leading institutional investors. ISSUE PRICE A company that is planning an IPO appoints lead managers to help it decide on an appropriate price at which the shares should be issued. There are two ways in which the price of an IPO can be determined: either the company, with the help of its lead managers, fixes a price or the price is arrived at through the process of book building. MARK-TO-MARKET MARGIN AND INTRADAY LIMIT Under the current clearing and settlement system, if an Indian investor buys and subsequently sells the same number of shares of stock during a settlement period, or sells and subsequently buys, it is not necessary to take or deliver the shares. The difference between the selling and buying prices can be paid or received. In other words, the squaring-off of the trading position during the same settlement period results in non delivery of the shares that the investor traded thus possible at a relatively low cost. FIIs and domestic institutional investors are, however, not permitted to trade without delivery, since non-delivery transactions are limited only to individual investors. One of SEBIs primary concerns is the risk of settlement chaos that may be caused by an increasing number of non-delivery transactions as the stock market becomes excessively speculative.

Accordingly, SEBI has introduced a daily mark-to-market margin and intraday trading limit. The daily mark-to-market margin is a margin on a brokers daily position. The intraday trading limit is the limit to a brokers intraday trading volume. Every broker is subject to these requirements. Each stock exchange may take any other measures to ensure the safety of the market. BSE and NSE impose on members a more stringent daily margin, including one based on concentration of business. A daily mark-to-market margin is 100 percent of the notional loss of the stockbroker for every stock, calculated as the difference between buying and selling price and the closing price of that stock at the end of that day. However, there is a threshold limit of 25 percent of the base minimum capital plus additional capital kept with the stock exchange or Rs1 million, whichever is lower. Until the notional loss exceeds the threshold limit, the margin is not payable. This margin is payable by a stockbroker to the stock exchange in cash or as a bank guarantee from a scheduled commercial bank, on a net basis. It will be released on the pay-in day for the settlement period. The margin money is held by the exchange for 6-12 days. This cost the broker about 0.4-1.2 percent of the notional loss, assuming that the brokers funding cost is about 24-36 percent (Endo 1998). Thus, speculative trading without the delivery of shares is no longer cost-free. Each brokers trading volume during a day is not allowed to exceed the intraday trading limit. This limit is 33.3 times the base minimum capital deposited with the exchange on a gross basis, i.e., purchase plus sale. In the event of brokers wishing to exceed this limit, they have to deposit additional capital with the exchange and this cannot be withdrawn for six months.

2.7 MUTUAL FUNDS Indian investors have been able to invest through mutual funds since 1964, when UTI was established. Indian mutual funds have been organized through the Indian Trust Acts, under which they have enjoyed certain tax benefits. Between 1987 and 1992, public sector banks and insurance companies set up mutual funds. Since 1993, private sector mutual funds have been allowed, which brought competition to the mutual fund industry. This has resulted in the introduction of new products and improvement of services. The notification of the SEBI (Mutual Fund) Regulations of 1993 brought about a restructuring of the mutual fund industry. An arms length relationship is required between the fund sponsor, trustees, custodian, and asset Management Company. This is in contrast to the previous practice where all three functions, namely trusteeship, custodianship, and asset management, were often performed by one body, usually the fund sponsor or its subsidiary. The regulations prescribed disclosure and advertisement norms for mutual funds, and, for the first time, permitted the entry of private sector mutual funds. FIIs registered with SEBI may invest in domestic mutual funds, whether listed or unlisted. The 1993 Regulations have been revised on the basis of the recommendations of the Mutual Funds 2000 Report prepared by SEBI. The revised regulations strongly emphasize the governance of mutual funds and increase the responsibility of the trustees in overseeing the functions of the asset management company. Mutual funds are now required to obtain the consent of investors for any change in the fundamental attributes of a scheme, on the basis of which unit holders have invested. The revised regulations require disclosures in terms of portfolio composition, transactions by schemes of mutual funds with sponsors or affiliates of sponsors, with the asset Management Company and trustees, and also

with respect to personal transactions of key personnel of asset management companies and of trustees. 2.8 FOREIGN INSTITUTIONAL INVESTORS FIIs have been allowed to invest in the Indian securities market since September 1992 when the Guidelines for Foreign Institutional Investment were issued by the Government. The SEBI (Foreign Institutional Investors) Regulations were enforced in November 1995, largely based on these Guidelines. The regulations require FIIs to register with SEBI and to obtain approval from the Reserve Bank of India (RBI) under the Foreign Exchange Regulation Act to buy and sell securities, open foreign currency and rupee bank accounts, and to remit and repatriate funds. Once SEBI registration has been obtained, an FII does not require any further permission to buy or sell securities or to transfer funds in and out of the country, subject to payment of applicable tax. Foreign investors, whether registered as FIIs or not, may also invest in Indian securities outside the country.

3.1 INDUSTRY PROFILE: 3.1.1 Following diagram gives the structure of Indian Financial System:

Figure: 3.1

3.1.2 FINANCIAL MARKET Financial markets are helpful to provide liquidity in the system and for smooth functioning of the system. These markets are the centers that provide facilities for buying and selling of financial claims and services. The financial markets match the demands of investment with the supply of capital from various sources. According to functional basis financial markets are classified into two types. They are: Money markets (short-term) Capital markets (long-term) According to institutional basis again classified in to two types. They are Organized financial market Non-organized financial market. The organized market comprises of official market represented by recognized institutions, bank and government (SEBI) registered/controlled activities and intermediaries. The unorganized market is composed of indigenous bankers, moneylenders, individual professional and nonprofessionals. 3.1.2(i)MONEY MARKET: Money market is a place where we can raise short-term capital. Again the money market is classified in to Interbank call money market

 Bill market and Bank loan market Etc. E.g.; treasury bills, commercial papers, CD's etc.

3.1.2. (ii) CAPITAL MARKET: Capital market is a place where we can raise long-term capital. Again the capital market is classified in to two types and they are Primary market and Secondary market. E.g.: Shares, Debentures, and Loans etc. 3.1.2. (iii) PRIMARY MARKET: Primary market is generally referred to the market of new issues or market for mobilization of resources by the companies and government undertakings, for new projects as also for expansion, modernization, addition, and diversification and up gradation. Primary market is also referred to as New Issue Market. Primary market operations include new issues of shares by new and existing companies, further and right issues to existing shareholders, public offers, and issue of debt instruments such as debentures, bonds, etc. The primary market is regulated by the Securities and Exchange Board of India (SEBI a government regulated authority).

FUNCTION: The main services of the primary market are origination, underwriting, and distribution. Origination deals with the origin of the new issue. Underwriting contract make the shares predictable and remove the element of uncertainty in the subscription. Distribution refers to the sale of securities to the investors. The following are the market intermediaries associated with the market: 1. 2. 3. 4. 5. 6. Merchant banker/book building lead manager Registrar and transfer agent Underwriter/broker to the issue Adviser to the issue Banker to the issue Depository

Investors protection in the primary market: To ensure healthy growth of primary market, the investing public should be protected. The term investor protection has a wider meaning in the primary market. The principal ingredients of investors protection are: Provision of all the relevant information Provision of accurate information and Transparent allotment procedures without any bias.

3.1.2.(iv) SECONDARY MARKET The primary market deals with the new issues of securities. Outstanding securities are traded in the secondary market, which is commonly known as stock market or stock exchange. The secondary market is a market where scrips are traded. It is a market place which provides liquidity to the scrips issued in the primary market. Thus, the growth of secondary market depends on the primary market. More the number of companies entering the primary market, the greater are the volume of trade at the secondary market. Trading activities in the secondary market are done through the recognized stock exchanges which are 23 in number including Over the Counter Exchange of India (OTCE), National Stock Exchange of India and Interconnected Stock Exchange of India. Secondary market operations involve buying and selling of securities on the stock exchange through its members. The companies hitting the primary market are mandatory to list their shares on one or more stock exchanges in India. Listing of scrips provides liquidity and offers an opportunity to the investors to buy or sell the scrips. The following are the intermediaries in the secondary market:
1. Broker/member of stock exchange buyers broker and sellers broker

2. Portfolio Manager 3. Investment advisor 4. Share transfer agent 5. Depository

6.

Depository participants.

3.1.2.(v) STOCK MARKETS IN INDIA: Stock exchanges are the perfect type of market for securities whether of government and semigovt bodies or other public bodies as also for shares and debentures issued by the joint-stock companies. In the stock market, purchases and sales of shares are affected in conditions of free competition. Government securities are traded outside the trading ring in the form of over the counter sales or purchase. The bargains that are struck in the trading ring by the members of the stock exchanges are at the fairest prices determined by the basic laws of supply and demand. Definition of a stock exchange: Stock exchange means anybody or individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. The securities include: Shares of public company. Government securities, Bonds Functions of Stock Exchanges: Stock exchanges provide liquidity to the listed companies. By giving quotations to the listed companies, they help trading and raise funds from the market. Over the hundred and twenty years during which the stock exchanges have existed in this country and through their

medium, the central and state government have raised crores of rupees by floating public loans. Municipal corporations, trust and local bodies have obtained from the public their financial requirements, and industry, trade and commerce- the backbone of the countrys economy-have secured capital of crores or rupees through the issue of stocks, shares and

debentures for financing their day-to-day activities, organizing new ventures and completing projects of expansion, diversification and modernization. By obtaining the listing and trading facilities, public investment is increased and companies were able to raise more funds. Regulatory Frame Work Of Stock Exchange A comprehensive legal framework was provided by the Securities Contract Regulation Act, 1956 and Securities Exchange Board of India 1952. Three tier regulatory structure comprising Ministry of finance The Securities And Exchange Board of India Governing body Members of the stock exchange: The securities contract regulation act 1956 has provided uniform regulation for the admission of members in the stock exchanges. The qualifications for becoming a member of a recognized stock exchange are given below:

The minimum age prescribed for the members is 21 years. He should be an Indian citizen. He should be neither a bankrupt nor compound with the creditors. He should not be convicted for fraud or dishonesty. He should not be engaged in any other business connected with a company. He should not be a defaulter of any other stock exchange.

3.1.3 STOCK EXCHANGE BOARD OF INDIA (SEBI) The securities and exchange board of India was constituted in 1988 under a resolution of government of India. It was later made statutory body by the SEBI act [Link] to this act, the SEBI shall constitute of a chairman and four other members appointed by the central government. With the coming into effect of the securities and exchange board of India act, 1992 some of the powers and functions exercised by the central government, in respect of the regulation of stock exchange were transferred to the SEBI. 3.1.3(i) OBJECTIVES AND FUNCTIONS OF SEBI

To protect the interest of investors in securities. Regulating the business in stock exchanges and any other securities market. Registering and regulating the working of intermediaries associated with Securities market as well as working of mutual funds.

Promoting and regulating self-regulatory organizations. Prohibiting insider trading in securities. Regulating substantial acquisition of shares and takeover of companies. Performing such functions and exercising such powers under the provisions of capital issues (control) act, 1947and the securities to it by the central Govt. .

3.1.3(ii) SEBI GUIDELINES TO SECONDARY MARKETS:

Board of Directors of Stock Exchange has to be reconstituted so as to include nonmembers, public representatives and government representatives to the extent of 50% of total number of members.

Capital adequacy norms have been laid down for the members of various stock

exchanges depending upon their turnover of trade and other factors.

All recognized stock exchanges will have to inform about transactions within 24 hrs.

3.2 COMPANY PROFILE:

3.2.1. Coal India Limited at a glance: Coal India Limited (CIL) as an organized state owned coal mining corporate came into being in November 1975 with the government taking over private coal mines. With a modest production of 79 Million Tones (MTs) at the year of its inception CIL today is the single largest coal producer in the world. Operating through 81 mining areas CIL is an apex body with 7 wholly owned coal producing subsidiaries and 1 mine planning and Consultancy Company spread over 8 provincial states of India. CIL also fully owns a mining company in Mozambique christened as 'Coal India Africana Limitada'. CIL also manages 200 other establishments like workshops, hospitals etc. Further, it also owns 26 technical & management training institutes and 102 Vocational Training Institutes Centers. Indian Institute of Coal Management (IICM) as a state-of-the-art Management Training 'Centre of Excellence' - the largest Corporate Training Institute in India - operates under CIL and conducts multi disciplinary management development programmes. CIL having fulfilled the financial and other prerequisites was granted the Maharatna recognition in April 2011. It is a privileged status conferred by Government of India to select state owned enterprises in order to empower them to expand their operations and emerge as global giants. So far, the select club has only five members out of 217 Central Public Sector Enterprises in the country. 3.2.2Indias Energy Scenario & Coal: India is currently among the top three fastest growing economies of the world. As a natural corollary India's energy needs too are fast expanding with its increased industrialization and

capacity addition in Power generation. This is where 'Coal' steps in. In India coal is the critical input for major infrastructure industries like Power, Steel and Cement. Coal is the most dominant energy source in India's energy scenario. Coal meets around 52% of primary commercial energy needs in India against 29% the world over. Around 66% of India's power generation is coal based. India is the 3rd largest coal producing country in the world after China and USA. 3.2.3 Unmatched Strategic Relevance: Produces around 81.1% of India's overall coal production In India where approximately 52% of primary commercial energy is coal dependent, CIL alone meets to the tune of 40% of primary commercial energy requirement Commands nearly 74% of the Indian coal market Feeds 82 out of 86 coal based thermal power plants in India Accounts for 76% of total thermal power generating capacity of the Utility sector Supplies coal at prices discounted to international prices Insulates Indian coal consumers against price volatility Makes the end user industry globally competitive Thus, plays a key role in "India Growth Story" and making India incorporate globally competitive. 3.2.4 Mission of Coal India Limited:

The Mission of Coal India Limited is to produce the planned quantity of coal, efficiently and economically with due regard to safety, conservation and quality. 3.2.5 Corporate Structure and Subsidiary Companies: Coal India is a holding company with seven wholly owned coal producing subsidiary companies and one mine planning &consultancy company. It encompasses the whole gamut of identification of coal reserves, detailed exploration followed by design and implementation and optimizing operations for coal extraction in its mines. The producing companies are: 1. Eastern Coalfields Limited (ECL), Sanctoria, West Bengal 2. Bharat Coking Coal Limited (BCCL), Dhanbad, Jharkhand 3. Central Coalfields Limited (CCL), Ranchi, Jharkhand 4. South Eastern Coalfields Limited (SECL), Bilaspur, Chattisgarh 5. Western Coalfields Limited (WCL), Nagpur, Maharashtra 6. Northern Coalfields Limited (NCL), Singrauli, Madhya Pradesh 7. Mahanadi Coalfields Limtied (MCL), Sambalpur, Orissa 8. Coal India Africana Limitada, Mozambique 9. The consultancy company is Central Mine Planning and Design Institute Limited (CMPDIL), Ranchi, Jharkhand. North Eastern Coalfields (NEC) a small coal producing unit operating in Margherita, Assam is under direct operational control of CIL. Coal India's major consumers are Power and Steel sectors. Others include Cement, Fertiliser, Brick Kilns, and small scale industries.

MoU Excellence: For previous three consecutive years CIL has bagged 'Excellent' rating in its Memorandum of Understanding (MoU) - a negotiated contract between Government and CIL Management - for performance evaluation on key physical and financial parameters. Production and Growth: Produces over 400 Million Tonnes of Coal annually. Coal production ending Financial Year 2011 was 431.32 Million Tonnes (MTs). CIL's dynamic production momentum is evident in the fact that in recent years, CIL leaped from 300 MTs mark achieved in 2003-04 to 400 MTs (2008-09) in a time span of 5 years. It took CIL 12 years to cross the 300 MTs production mark from that of 200 MTs achieved in 1991-92. CIL Is targeted to produce 452 MTs FY ending 2012. Two of the subsidiary companies of CIL South Eastern Coalfields Limited and Mahanadi Coalfields Limited are in the elite club of 100 MTs coal producing companies which number only a few worldwide. Acquiring assets abroad: It is becoming increasingly evident that domestic coal demand is far outstripping the indigenous production in India. The gap between demand and supply is ever expanding. Especially so in the wake of increased capacity addition in power sector which predominantly coal dependent.

In spite of best efforts, realistically CIL would not be able to satiate growing coal demand. Letters of Assurance (LoA) issued so far are already in excess of CIL's production. Present analysis indicates that there would be a shortage of 350 MTs of coal by 2016-17. To meet this need coal import is inevitable. CIL has taken it upon itself, in the interest of meeting the country's energy requirement, and is foraying into foreign shores for acquisition of coal properties. For the purpose CIL has adopted a three pronged approach. Acquisition of coal properties directly on its own; through equity participation with coal mining companies abroad and through long term coal off-take contracts. Transparency Initiatives: Introduced e-auction for selling coal to any consumer from any location in a transparent manner. Introduced Integrity Pact in High Value Procurement. e- procurement introduced for speeding up purchase of vital inputs Employee Welfare& CSR: Pursues a structured CSR policy around coal mining areas to improve quality of life with community consensus and inclusive participation Mobile Dispensaries and wellness clinics introduced on a large scale. Tele-medicine facilities introduced in central hospitals. Provides medical services to employees, their families and local populace through 86 fully equipped hospitals having 5835 beds. Employs 1524 specialist Doctors.

 Runs 423 dispensaries and has 640 Ambulances. Provides potable water to about 2.3 million populace in remote corners of CIL's areas of operation Supports 536 schools under different categories - Project Schools (55); Privately managed Schools with grant packages (284); Private Committee Managed Educational Institutes (72) and other schools where occasional grants are given (125). Introduced 'Coal India Scholarships' for 100 Below Poverty Line students plus 25 wards of land losers in government engineering and medical colleges. Scholarship covers education, hostel and mess charges Meets the entire cost of wards of workmen securing admission in government engineering and medical colleges Committed to generate employment opportunities for people in mining areas by providing vocational training. The company Pursues 'Mining with a human face' through socially sustainable inclusive model of growth by making Project Affected People stakeholders in the decision making process for their livelihood. Medical facilities extended to nearby communities in fully equipped company hospitals. Mobile dispensaries and Tele-medicine facilities meant for employees also extended to nearby village populace. Care for Environment: One of the inherent tendencies of coal mining is degradation of the land and environment. CIL constantly addresses the impact of mining activities across environmental and social issues.

Eco-friendly mining systems have been put in place in all of its mining areas. To make environmental mitigation measures more transparent, CIL introduced state-of-the-art Satellite Surveillance to monitor land reclamation and restoration for all opencast projects. Coal India has made afforestation over an area of around 32,000 Hectares while the total forest area degraded due to mining operation is around 12,800 Hectares, which means, for every hectare of forest land degraded, CIL has made plantation in 2.5 Hectares of land. Committed to minimize the adverse impact of coal mining on environment through well structured Environment Management Plans and sustainable development activities. As a part of 'Clean & Green' programme, massive plantation has been taken up by CIL wherever land is available. CIL has till date planted over 73 million trees. A positive result of this effort towards improvement of environment through massive plantation undertaken in Singrauli Coalfields since 1985, is such that the analysis for the period 1985-1995 and 1996-2002 carried out by Conservator of Forest indicates that the annual average maximum temperature in Singrauli has decreased by 0.4oC while the annual average rainy days increased by 11.2 days and average annual rainfall has increased by 105.6 mm. CIL has started integration of Environment Management System (ISO:14001) with Quality Management System (ISO:9001) and till date have successfully achieved certification of 53 of its projects. This integration is being extended to all mines in phases.

3.2.6 According to Angel Broking Firm, the value per share works out to be Rs 294 according to DCF Method. This fair value calculated by Angel Broking Firm is justified on the following calculation bases: 1) Raw coal production to grow at 6% CAGR over FY2010 12E Historically, CILs raw coal production has grown by 5.4% over FY2001-10; it stood at 431mn tonnes in FY2010

Figure: 3.1 2) Sales volume to witness a 5.4% CAGR over FY201015E

Figure: 3.2 a. Beneficiated coal sales to treble by FY2015E

Figure: 3.3

b. Sales mix improving

Figure: 3.4

c. E-auction volumes stands to increase

Figure: 3.5 3) Belended realization on an upfront

They expected CILs average blended realisation to register a 6.1% CAGR over FY201015E on account of a) a 5.1% CAGR increase in raw coals notified price over FY201015E, b) increased proportion of beneficiated coal sales, which commands a ~120% premium over the notified coal price and c) gradual increase in e-auction sales volumes.

a) Blended realization to gain

Figure: 3.6

b) Raw coal prices to report a 5.1% CAGR

Figure: 3.7

c) Net revenue to grow at 10.7% CAGR

Figure: 3.8

1. Manpower reduction to keep cost under check CILs employee cost, which is a major cost for the company, witnessed large variations on account of the National Coal Wage Agreement-VIII and Executive Pay Revision. Hence, CILs employee cost as a percentage of total cost increased to 51.5% in FY2009 and 45.7% in FY2010 as compared to 40.8% in FY2007. The provision on account of the wage agreement was at 1,756cr in FY2008 and 8,115cr in FY2009. However, there was a small write-back of `264cr in FY2010. This resulted in depressed EBITDA margins, given that there were no hike in coal prices in FY2007 and FY2008. EBITDA margins declined from 21.6% in FY2007 to 17.5% in FY2008 and further to 6% in FY2009 before increasing to 22% in FY2010 on account of an 11% price hike in October 2009. The next round of wage revision is due in July 2011. However, on the positive side, CILs employee strength, which stood at 439,343 employees in FY2007, has seen a steady decline to 397,138 employees in FY2010. Thus, we expect staff cost per tonne to be at `405 in FY2012E. a. Staff cost as a % of total cost

Figure: 3.9

b. EBIDTA margins expected to be expand

Figure: 3.10

c. Net profit grew at 13.7% over FY2010 FY12E

Figure: 3.11

3.2.7 Coal India (CIL), a Navratna company, is the worlds largest coal producer. The company accounts for nearly 82% of Indias total coal production. Coal India is the largest coal producer in the world and it is unique and there are no comparable companies listed on the stock exchanges in [Link] will continue to be the prime source of energy in India over the next 50 years. So, Coal India has good prospects of increasing its profitability in the coming

years because coal is limited resource and the prices of coal can only go up. Coal Prices peaked in 2008 before cooling off substantially, but are slowly rising again. 1. Largest producer and supplier of coal Being the largest producer of coal, CIL contributes 80% of the countrys total coal output. Open cast mines contribute 90% to CILs total coal production. Though CIL virtually supplies its coal to all relevant industries, 80% of the coal requirement by the countrys power sector is met by CIL. At present (FY10), ~96.5% of the companys revenue is contributed by raw coal. Share of coal production in India

Figure: 3.12 2. Growing demand for coal to provide support With the rising demand for coal in India the company is very well positioned as the sole supplier of coal to industries like power, steel, cement, etc. In India, coal is the primary source of fuel for thermal power plants, which consumed 77% of the total coal produced in India during 2009. 3. Significant leeway to increase prices:

CIL sells raw coal at a ~63% discount to global prices. We expect blended realisations to increase at a 6.1% CAGR over FY201015E on account of a) a 5.1% CAGR increase in raw coals notified price over FY201015E, b) increased proportion of beneficiated coal sales, which commands a ~120% premium over the notified coal price and c) gradual increase in eauction sales volumes from 11.6% of raw coal sales in FY2010 to 12.5% in FY2012E, where realised price is ~60% higher than the notified price. 4. Competitive cost structure: CIL is one of the lowest-cost coal producers in the world, with an average cost of US $16/tonne. This is because CILs production from open cast mines, which have significantly lower production cost (US $11/tonne), accounts for 90% of its total production as compared to underground mines, which have a higher production cost of US $59/tonne.

4. DATA ANALYSIS AND INTERPRETATION 4.1 Issue Details:

Offer aggregating up to [] million Of which 631,636,440 Equity Shares*.

Employee Reservation Portion#(1)

63,163,644 Equity Shares

Therefore,

Net Offer# Of which

568,472,796 Equity Shares

QIB Portion##*** Of which Mutual Funds Balance for all QIBs including Mutual Funds

At least 284,236,398 Equity Shares**

[] Equity Shares** [] Equity Shares**

Non-Institutional Portion Retail Portion(1)

Not less than 85,270,919 Equity Shares** Not less than 198,965,479 Equity Shares**

Pre and post-Offer Equity Shares Equity Shares outstanding prior to the Offer: Equity Shares outstanding post the Offer: 6,316,364,400 Equity Shares 6,316,364,400 Equity Shares

Table: 4.1

Table: 4.2

Table: 4.3

Table: 4.4 4.2 IPO VALUATION: Strong fundamentals, high investor interest and valuation estimates indicate good listing gains for the Coal India stock, say experts. The countrys largest IPO ever has generated high investor interest, particularly in institutional investors, which is reflected in the over Rs 2,35,000-crore the IPO has garnered in subscriptions. Coal India Ltd is a coal mining company and there is no other listed peer in India with which it can be compared with. Since the Offer is being made through the Book Building Process, the Offer Price will be determined on the basis of investor demand. The face value of our Equity Shares is Rs. 10 each and the Offer Price is 24.5 times of the face value of our Equity Shares. The Offer Price of Rs. 245 has been determined by the Selling Shareholder and our Company in consultation with the BRLMs on the basis of the demand from investors for the Equity Shares through the Book Building Process and is justified based on the accounting ratio given below: NET ASSET VALUE PER EQUITY SHARE: 1. As of June 30, 2010 (Consolidated): Rs. 44.94 2. As of June 30, 2010 (Standalone): Rs. 29.69 3. Offer Price: Rs. 245 4. As of June 30, 2010 (Consolidated) after the Offer1: Rs. 44.94 5. As of June 30, 2010 (Standalone) after the Offer1: Rs. 29.69

There will be no change in the net worth post-Offer as the Offer is by way of offer for sale by the Selling Shareholder. Note: Net asset value per Equity Share represents net worth (excluding miscellaneous expenditures, if any) as restated, divided by the number of Equity Shares outstanding at the end of the period. The above information has been adjusted for all periods, based on new number of shares after sub division of each equity share of face value of Rs. 1,000 each into 100 equity shares face value of Rs. 10 each. Now, according to us to calculate the fair value of CILs share we used formula of NET WORTH PER EQUITY SHARE, and the value comes out to be Rs 297 as on 30th, June, 2010. This is calculated as fallows: NET WORTH PER EQUITY SHARE = NET WORTH/No. Of EQUITY SHARES NET WORTH PER EQUITY SHARE = RS 187525.92 (Rs in millions)/631.64 (in millions) So, the price at which the shares was quoted is Rs 245 which less than Rs 297, it means that they offered at discount and has prospect of increase in price in future. One has to look at the business model to arrive at the right number of valuation. Coal India business model is not like a commodity company at all. If you see coal prices have virtually never declined in India over the last ten years. Even going forward, we do not expect any price cut.

On the volume front, volumes will be constrained by Coal Indias production challenges rather than demand. We have a demand deficit in India of thermal coal of around 50 million tonne or so currently. Therefore the cyclicality in earnings that commodities stocks have is virtually absent in the case of Coal India. If you look at the multiples, it is closer to a utility company rather than a commodity company. Coal commodity companies globally are trading between 6-7 times one year forward EV/EBITDA. If you take utility companies in India, they are around 11 times one year forward EV/EBITDA. We think 9 times multiple is fair enough for Coal India. It is still at a discount to the utility multiple but it has to be at a significant premium to the coal companies globally. On the discounted cash flow method, too, which most analysts are using to value Coal India stock, its value per share works out to Rs 300-310, which is encouraging. Reinvestment Rate: If we relax the assumption that the only source of equity is retained earnings, the growth in net income can be different from the growth in earnings per share. Intuitively, note that a firm can grow net income significantly by issuing new equity to fund new projects while earnings per share stagnate. To derive the relationship between net income growth and fundamentals, we need a measure of how investment that goes beyond retained earnings. One way to obtain such a measure is to estimate directly how much equity the firm reinvests back into its businesses in the form of net capital expenditures and investments in working capital. Equity Reinvestment Rate = Growth Rate / ROE

Forecasting Free Cash Flows: Free cash flow is the cash that flows through a company in the course of a quarter or a year once all cash expenses have been taken out. Free cash flow represents the actual amount of cash that a company has left from its operations that could be used to pursue opportunities that enhance shareholder value - for example, developing new products, paying dividends to investors or doing share buybacks. Free cash flow = EBIT (1-tax) [EBIT (1-tax) Reinvestment Rate]

EBIT (1-tax) nth year = EBIT (1-tax) n-1 year (1 + growth rate)

Present Value: The present value of a single or multiple future payments (known as cash flows) is the nominal amounts of money to change hands at some future date, discounted to account for the time value of money, and other factors such as investment risk. A gi ven amount of money is always more valuable sooner than later since this enables one to take advantage of investment opportunities. Present values are therefore smaller than corresponding future values. When future cash flow of the company is divided by the discount rate we get the present value of that predicted years cash flow. Present Value n Where, n = year Forecasting Free Cash Flows: = Predicted cash flow n/(1+ discount rate)n

FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E Key assumptions (mn tones) Total sales volume Linkage volume E-auction volume Beneficiated coal Average (Rs/tone) 409.9 349.5 45.7 14.6 436.6 370.7 50.6 15.3 1149 415 459.5 385.3 55.0 19.1 1218 405 484.5 405.7 58.0 20.9 1281 466 508.3 418.7 59.8 29.8 1366 474 532.0 427.8 61.1 43.0 1461 483

revenue 1089

Average staff coast 406 (Rs/tone)

Key financials (Rs Cr ) Net revenue % change EBITDA % change Net income % change EPS Net cash per share BPS 46684 14.4 10263 317 9834 142 16 59 41 50183 7.5 11812 15 10518 7 17 71 52 55971 11.5 14959 27 12712 21 20 87 67 62060 10.9 14799 (1) 12584 (1) 20 103 80 69424 11.9 18261 23 15275 21 24 125 97 77707 11.9 22375 23 18530 21 29 152 119

Financial ratios EBITDA margin (%) Net margin (%) RoE (%) 22.0 21.1 43.8 23.5 21.0 35.7 26.7 22.7 33.8 23.8 20.3 27.1 26.3 22.0 27.3 28.8 23.8 27.2

RoCE (%)

34.5

31.1

32.1

25.8

27.3

28.3

Valuation ratios (x) EV/EBITDA P/E P/BV 11.5 15.7 6.0 9.3 14.7 4.7 6.7 12.2 3.7 Table: 4.5 Fair value at Rs 294 The Angel Broking Firm arrived at a fair value using the discounted cash flow (DCF) methodology and assumed a discounting rate of 13.9% and perpetual growth of 3%. 6.0 12.3 3.1 4.2 10.1 2.5 2.6 8.4 2.1

4.3 DISCOUNTED CASH FLOWS:

(Rscr) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Terminal value EBIT 10240 13139 12787 16137 20151 22858 26047 28395 30935 33718 -

(Rscr)
Tax rate(%) No PAT

Present value of future cash flows Present values of terminal value

Depreciatio 1572 1820 2012 6861 8803 8567

33.0

33.0

33.0

33.0 10812 2124

33.0 13501 2224

33.0

72838 68154

33.0 17452 2391

33.0 19025 2461

33.0 20726 2522

33.0 22591 2577

15315 2313

Net debt n
Operating values Equity 8432 cash flow Capex 10623 10579 12936 15725

(44777)
17628 18577019843 21485 23248 25168 -

No. of share(cr)
(3500) (4000) (3000) (3000 ) 972 802 879 (3000)

632
(3000) (3000) (3000) (3000) (3000) -

Value per share(Rs)

Change WC Free flow cash 5801 7210 8551 in 869 587

294
876 959 1017 1108 1207

10738

13604

15504

17802

19503

21356

23375

220477

Table: 4.6 Terminal Value = FCF/WACC g

Table: 4.7

4.4 SENSITIVITY OF DISCOUNT RATE AND TERMINAL GROWTH: Sensitivity analysis is the investigation of how the projected performance varies along with changes in the key assumptions on which the projectionsare based. The sensitivity analysis of the above DCF model can be done as follows: Discount rate (%) 13.0 2.0 Terminal 2.5 Growth Rate (%) 3.0 3.5 4.0 305 311 317 325 333 13.5 293 298 304 311 318 Table: 4.8 14.0 284 289 294 300 306 14.5 273 277 281 286 292 15.0 264 267 271 276 281

Peer comparison: At the lower price band, CIL will trade at 8.2x and 5.8x FY2011E and FY2012E EV/EBITDA, while at the upper band it will trade at 9.3x and 6.7x its FY2011E and FY2012E EV/EBITDA, respectively. On the P/E basis, the company will trade at 13.5x and 11.2x FY2011E and FY2012E earnings; while at the upper band, it will trade at 14.7x and 12.2x its FY2011E and FY2012E earnings, respectively, in line with its global peers.

Market Cap
Company (US mn)

PE Ratios (x)

EV/EBITDA (X)

CY09/FY1 0

CY10/FY1 1
24.0 15.9 17.1 88.2 23.7

CY11/FY1 2
10.7 11.0 11.5 10.2 11.3

CY12/FY13

CY13/FY1 4

CY14/FY15

Arch Coal CONSOL Energy Peabody Energy Mossey Energy International Group Centennial Coal Co. Coal & Allied Ind. Gloucester Coal MocArthur Ltd. New Hope Corp. Ltd. Whitehaven Ltd. Western Coal Corp. Adaro Energy Tbk Tambang Batubara Bukit AsamTbk PT Coal Coal Coal

4376 9061 13935 3731 1233

61.8 13.8 30.3 31.6 35.2

12.4 7.9 12.6 9.3 8.4

8.2 8.7 8.4 10.9 7.7

5.4 6.1 6.0 4.7 5.2

2440 9664 1370 3856

41.8 23.5 17.4 26.8

16.2 17.6 15.1 13.8

12.9 11.7 9.7 11.0

15.2 13.7 18.9 16.7

7.6 11.5 10.4 8.8

6.5 6.6 6.0 7.0

4389

23.0

21.9

20.2

14.4

10.7

10.0

3127

58.3

29.0

15.3

28.7

16.5

8.9

2313 7887 5294

55.8 15.7 16.2

8.0 20.9 19.7

5.8 13.0 13.8

23.5 7.0 10.7

5.7 8.3 13.5

3.8 5.8 8.7

Banpu PCL Coal India*@225 Coal India*@245 Average (x)

6689 31580

13.9 14.5

12.0 13.5

10.9 11.2

12 10.2

12.5 8.2

7.5 5.8

34387

15.7

14.7

12.2

11.5

9.3

6.7

31.0

21.9

11.9

14.1

10.0

6.6

Table: 4.9 4.5 RATIOS: FY07 EPS Cash EPS Book Value EBITDA Margin (%) Net profit Margin (%) RONW ROCE Net Debt/Equity Enterprise value (EV) EV/EBITDA 6.7 8.7 25.7 21.9 13.3 25.9 47.2 -0.9 138939.7 20.1 FY08 6.8 9.2 27.2 18.1 12.4 24.9 43.7 -1.1 135673.3 21.7 FY09 6.4 9.1 30.1 6.4 10.0 21.4 27.9 -1.4 127204.4 48.6 FY10 15.6 17.6 40.9 22.4 21.1 38.0 50.5 -1.4 117760.0 11.3

Sales to Equity Market Cap Market Cap to Sales Price to Book Value

1.9 154750.9 4.9 9.5

2.0 154750.9 4.5 9.0

2.1 154750.9 3.8 8.1

1.8 154750.9 3.3 6.0

Figure: 4.10

5.1FINDINGS:
1. With the thorough analysis of the companys performance before 2010 and the

calculations related to the future of the company performance include Net Revenue which is forecasted to increase 46,684 in 2010 to 77,701 in 2015. EPS is expected to benefit the shareholders as it is expected to grow from Rs 16 in 2010 to Rs 29 in 2015.
2. Comparing price and earnings per share for a company, it can be analyzed that the

market's stock valuation of a company and its shares relative to the income the company may generate huge profits in the future. Stocks with higher (and/or more certain) forecast earnings growth will usually have a higher P/E. Investors can use the P/E ratio to compare the value of stocks.
3. Good Financial Performance:

a. Healthy RoE (5 year average of 33%) & RoCE (5 year average of 48%) b. Consistent cash flow generation (cash on books approximately Rs. 39bn) & negligible debt

c. Good dividend paying history (5 year average dividend payout ratio of 37%)

5.2 CONCLUSION:
Coal India (CIL) is the world's largest coal company both in terms of production (431mt in FY10 - 82% of India's total production) and reserves. CIL operates 471 mines in 21 major coalfields (five coal fields accounted for ~65% production over the last three years) across 8 states in India. It enjoys higher margin as compared to its global peers due to low cost of production which gives the further room to the company to increase its domestic price. Its initial public offering (IPO) has seen a blockbuster response from qualified institutional bidders (QIB) as it got subscribed 24.7 times. According to Angel Broking Firm, the value per share works out to be Rs 294 according to DCF Method, and according to study the fair value of CILs share comes out to be Rs 297 through NET WORTH PER EQUITY SHARE method. Though analysts value the stock using different methods, on average the fair value of Coal India works out to around Rs 310 per share, which from the retail investors perspective (who have been allotted shares at Rs 232.75, considering 5 per cent discount) means over 33 per cent returns.

The market need to treat Coal India (CIL) as a utility play. Investment in this IPO was a value for money. There is not even a single broker or research house that came across and that did not have a buy rating on the company. Whatever may be the fair price of Coal India, retail investors should have no reasons to worry. In fact, considering Coal India solid business model and prospects in the industry, experts advise to hold on to the stock for the long term. The company is well positioned to capitalize on significant demand supply gap in India and hence the price at which the share was quoted was Rs 245 which less than Rs 297, it means that they offered at discount and has prospect of increase in price in future.

5.3 SUGGESTIONS AND RECOMMENDATIONS:

After observing the statistics of five years the company is expected to perform well financially within the coal industry .The EPS vindicate the growth where the potential investors can invest in the company to be in profit. CRISIL has assigned a CRISIL IPO Grade 5/5 (pronounced "five on five") to the proposed IPO of Coal India Ltd (Coal India). This grade indicates that the fundamentals of the IPO

are strong relative to the other listed equity securities in India. Wherein the investors need not worry about the creditability of the company. Largest producer of coal in the world, dominant position in India. Coal India is the largest producer of coal in the world. It owns 48% of Indias proven reserves and contributes over 81% of the total coal production in India. There will be a balance in demand and supply, which ensures the stability of the company. Margin Improvement: 1. Gradually replacing natural attrition of human labour with mechanised activities to reduce employee costs. 2. Gradually phasing out old loss making legacy mines (mainly underground mines which have a higher cost of production) to cut losses. 3. Increasing sale of washed coal from 4% to 40% will increase margins. Washed coal has a higher calorific value and much higher price realisation and profit margin as compared to raw coal. Also, pay-back period for a washing plant is less than one year. 4. Increase in proportion of e-auction sales from 10% to 20% (still to be decided by the Government). At the higher end of the price band (Rs.245), with estimated extractable coal reserves of 21.6 bn tonnes, CIL trades at an EV/ton of $1.6. CIL's EV/ton is one of the lowest in the world and such low valuations could be attributed to the discounted price at which CIL sells its coal. Also, CIL trades at a P/E of 16x and P/BV of 5.7x. Although these valuations don't appear to be very attractive, considering the monopoly nature of CILs business, valuations seem

to be fair enough. Hence, considering the monopoly nature of business, limited downside due to coal price buffer and decent valuations, its recommend to 'Subscribe' the issue.

BIBLOGRAPHY
1. Financial Management by Prasanna Chandra 2. Coal India Ltd Initial Public Offer Prospectus
3. Company History: [Link] 4. Industry History: [Link]

[Link]
5. [Link]

6. CRISIL: [Link] 7. Angel Broking: [Link]