Should investors bet on Coal India?

Buying into a state-controlled fossil-fuel giant, in a famously bureaucratic country, amid a commodity slump, is not an obvious trade, notes Una Galani.

Coal India offers investors a cheap and dirty play on Indian reform. A sale of another 10 percent of the monopoly could raise $3 billion.

Buying into a state-controlled fossil-fuel giant, in a famously bureaucratic country, amid a commodity slump, is not an obvious trade. But the bet could stack up.

Investors gave Coal India's last big offering a mixed reception.

The company raised $3.6 billion in January in the country's largest-ever equity deal but almost half was bought by Life Insurance Corp of India, a state-run entity that often mops up unwanted stock sold by New Delhi.

The government still owns around 79 percent of the coal miner.

Those that did invest then have been somewhat shielded from a wider correction: Coal India shares have fallen 7 percent compared to a 12 percent drop in the CNX Nifty index.

That was despite reports another big offering was coming, which has weighed on the stock. 

The global commodity meltdown is of little worry. Coal India has most of the domestic coal market and low-cost mines.

That means the company is highly profitable, with a roughly 20 percent net profit margin, even though it is obliged to sell most of its production well below global prices.

It is also in line to benefit from reforms. Prime Minister Narendra Modi promises to provide round-the-clock energy to the nation. That's already having an effect.

Coal India's production grew almost 9 percent in the six months to September or almost 6 times the annual average growth rate for the past five years.

Ambitious plans to bail out indebted state-owned electricity distribution companies could fuel further growth.

So at current market prices, betting on the giant could make sense.

Coal India shares trade at a price of 13.1 times forward earnings, or a 12 percent discount to the main share index.

A dividend yield of 5.5 percent is also almost four times larger than the average.

If investors still have appetite to buy shares in one of the region's most expensive markets, Coal India might stack up.