This is the first IPO of a public sector undertaking graded by Crisil getting the top-most grade

Crisil has assigned a top-grading to the proposed share-sale of public sector Coal India Ltd (CIL), giving it a Crisil initial public offer (IPO) Grade ‘5/5' (pronounced “five on five”) grading. This grade indicates that the fundamentals of the IPO are ‘strong' relative to other listed equity securities, the agency said.

A Crisil release said that the assigned grade reflects CIL's dominant position in the Indian coal industry vis-a-vis its 81 per cent market share, 53 per cent of India's energy requirement. It noted that coal demand was expected to rise 11.2 per cent annually over the next four years. Head of Securities, Crisil, Chetan Majithia told the The Hindu that this was the first instance of an IPO of a PSU graded by Crisil getting the top-most grade. Two other issues had made it to this grade in 2008.

When contacted by The Hindu, top officials in the Disinvestment Department said that the grading showed the strength and value of the company.

It may be mentioned that IPO-grading was made mandatory by SEBI in April 2007.

Crisil, however, cautioned that this grade was not a recommendation to buy sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.Giving the rationale behind the grading, Crisil said CIL enjoyed cost-competitive advantage over international players since nearly 90 per cent of its production was from open-cast mines with low stripping ratios.

As a result, the notified prices of CIL are lower than imported coal prices adjusted for calorific value. The grade also takes into account the de-controlled pricing regime. Further, CIL has been gradually increasing its mix of market-linked price sales, which has boosted its profitability.

As of March 2010, CIL had a cash and bank balance of Rs. 39,000 crore. “We believe this, together with its strong cash generation and very low gearing, would enable the company to pursue growth opportunities globally and also comfortably fund its capital expenditure plans of Rs. 8,450 crore over the next two years,” Crisil said. However, several socio-political factors limit CIL's operating flexibility. Delays in regulatory approvals, such as forest clearance, are an industry-wide concern and also remain a challenge for the company. Any adverse change in the regulatory regime on pricing regulation and restriction on mining area could have a material impact on the grade.

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