Coal India - Initiating Coverage - TP Rs.424 - SPA Securities

Coal India is the 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. It accounts ~81% of India's overall coal production and meets coal requirement for ~76% of total thermal power generating capacity of the utility sector. We initiate with a "BUY" recommendation on the stock.

Investment Rationale

FSA/LOAs to take CIL to different trajectory

CIL will be the one of the beneficiaries of the recent directive of the Government to address domestic power supplies, as the same should work as an ice-breaker for production bottlenecks seen in recent years through faster clearance for mining areas (both forest & environmental) and also due to availability of rakes and other means of transportation. We expect CIL's production volumes to register a CAGR of 4.65% over FY12-FY14E vis-à-vis 2.58% registered over FY09-FY12.

E-auctions volumes intact

E-auction sales contributed ~11.8% & ~21.2% to CIL's volumes & revenues respectively in FY12. We expect even with increased supplies to power sector, volumes from e-auction to remain intact in absolute terms and contribute ~10.6% & ~20.4% to CIL volumes & revenues in FY14E respectively. Realizations in case of eauctions were ~80% higher than the average blended price of the Company in FY12.

Washeries to play an important role - but only after FY14E

CIL is setting up 20 new coal washeries with a combined capacity 111.1 mt during the 12th plan by incurring a capex of INR 25 bn. This would lead to improved blended realisations (washed coal commands ~60% higher realisation) and will contribute ~4.8% at EBITDA levels by FY17E vis-à-vis 3.1% in FY12. We expect CIL's washed coal volumes & revenues to register a CAGR of 5.6% & 8.1% respectively over FY12-FY14E.

Capex plans

CIL plans to incur a capex of INR 45 bn p.a. over the next 5 years for increasing production, development of new projects and procure efficient machineries. It has also kept aside INR 60 bn for acquisitions of coal blocks outside India. It is further planning to invest INR 250 bn over the next 5 years to built necessary infrastructure including the development of 6 railway lines. CIL is self-sufficient to finance these capex plans through a strong cash balance of INR 563 bn as of FY12.

Shift to GCV from UHV- In favor of CIL

In Jan 2012, CIL has shifted from UHV based pricing methodology to globally followed GCV pricing. The same has been positive for CIL & has led to improvement in realizations by ~6-7%, while having a negative impact on two of its subsidiaries viz. WCL & ECL (~11% revenue contribution respectively). CIL has taken a price increase for ~10-15% in case of WCL and we expect similar kind of action in regard to pricing for ECL in a while.

Outlook & Valuation

We believe policy logjams which were apparent in the last few years are taking a backseat with strong focus of the Government to sort out coal supplies issues. With faster clearances of projects (aiding production), intact e-auction volumes, wage negotiations behind us, increased availability of rakes sorting logistics bottlenecks, ample free cashflow generation and huge cash balance (~26% of market cap), we expect CIL's revenues & net profit to register a CAGR of 8% & 14% respectively over FY12-FY14E. We recommend a "BUY" on the stock with a target of INR 424 based on FCFE valuation approach. At CMP the stock is trading at P/E of 11.6x FY14E EPS and Adj. EV/EBIDTA (excluding OBR expenses) of 6.1x its FY14E EBIDTA.

Source : Equity Bulls

Keywords