Okay, I'm combining the general view of higher returns and my view of purchasing this stock after some time at a lower price than now. Please note that these calculations are not mine, they are from a well known financial investment book. Also, I've tried to take both the views simultaneously, bullish & bearish. So, here we go..
Bullish Assumption: Assuming that we think this stock can give an average return on investment of 2X % per year, even if the market only grows X % on an average annually for next 15 years.
Bearish Assumption: Unfortunately, we are so enthusiastic that we pay too high a price now, however, the stock loses 50 % of its value in the first year.
Result: In that case, even if the Coal India's stock then generates double the market's return, it will take us more than 16 years to overtake the market.
Why?
Simply because we paid too much, and lost too much, at the outset.
Conclusion: Losing some money is an inevitable part of investing, and there's nothing we can do to prevent it. However, we must take responsibility for ensuring that we never lose most or all of our money. By refusing to pay too much for an investment, we minimize the chances that our wealth will ever disappear or suddenly be destroyed.
Despite the above Risks , I think that Coal India is one of the best quality stocks to come out in India’s Primary Markets. However, investors should be wary of the risks which will be glossed over by the mainstream media and brokerages. As with every investment however safe it might look, there are risks. This does not mean that investors should be fearful of every investment. It is by being aware of the risks, that prudent risk management can be done which is essential to successful investing.
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Since we Indians are so much positive on the PSUs, I'll give out couple of more reasons why I think that it is risky to invest in this stock at present levels. Note this does not make me negative on the stock on which I am very positively biased. It is just to give investors the other side of the debate which I think general analysis will lack.
Dangers of Being Government Owned– Government owned Fossil Fuel Companies like IOC, ONGC, BPCL have a long history of subsidies and losses. The profits and losses of these companies despite being listed on the public markets are subject to the whims and fancies of the government.
Coal India prices its products significantly below international market costs which has little justification. Though the Company manages to get 15% Net Margins, it could change drastically depending on the fickle nature of the Party in Power. The Government is planning a new legislation which will lead to giving of 20% of profits of mining companies to local communities. CIL being government owned will definitely come under the ambit of this proposed law leading to a potential decrease in profits.
Growth Rate is not Fantastic by Any Means– CIL has managed a decent growth of around 10% which it will find difficult to accelerate despite huge demand due to its not so competent management and organization. The Company’s structure won’t change radically with public listing overnight. So while CIL could be a good safe investment, it might not be a multi-bagger in the near future.
Global Carbon Tax and Climate Change Legislation– Coal is the Dirtiest form of Energy and its cheapness is due to the fact that implicit costs on the society are not added to Coal. It is already well known that Coal has huge pollution and health costs. Mercury poisoning, Degradation of Land and Ecology are some of the other negative environmental effects of Coal Mining and Usage. Its no wonder that Coal India’s Advertisements show Afforestation Measures to try and bolster its Green Credentials. But make no mistake CIL is the biggest polluter in India. A Global Carbon Tax or something to that effect might radically change the structure of the Coal Industry quite negatively.