Coal India Limited - Thrust on faster clearances for future growth - Antique

In a sweet spot due to structural deficit of coal and monopolistic presence: Coal India Limited (CIL) with a coal reserve of ~20bnt and resource of ~60bnt stands to be a natural beneficiary of the prevailing demand/supply gap of coal (~100mt in FY11 and set to cross ~170/200mt by FY17e), and thus it does not face any off-take risk. As the progress in development of captive coal blocks has been very slow, the dependence on CIL has increased. This, coupled with reasonable pricing (average sale price of ~USD30/tn vis-à-vis imported coal price of ~USD60-65 CIF), provides a cushion for robust long-term earnings.

Production and Offtake to grow at a CAGR of 5.7% and 5.4% respectively over FY12-15e

Production and offtake has grown at a CAGR of 3.5% and 3.6% respectively over FY08-12and the management expects it to grow at a CAGR of 9% over FY12-17e as against ourestimate of 7%. Coal India had upped the production target from 556mmt to 615mmt inFY17e (Antique est 572mmt) due to 60mmt expected contribution from contract mining.

Finally 4.8% average hike in realisations taken; margins set to expand

Coal India has taken a 10% hike in coal prices for coal with GCV ranging between 2200-6000 kcal and 12% reduction for coal with GCV ranging between 6000-6300 kcal. This cumulates into average price hike of 4.8% effective from June'13 which as per the management will provide incremental revenue of INR21bn for FY14 and INR24bn for FY15. This hike has been taken to offset increase in wages of contract employees and diesel prices due to diesel price deregulation which would have resulted in higher cost of INR20bn for CIL in FY14e (for every INR1/litre increase in diesel prices financial impact for CIL was INR1.2bn).

Low cash costs to provide margin improvement

CIL's non-executive wage costs (~50% of operating cost) are revised every five years. The last wage revision was effective from July 1, 2011 and has been provided in FY12; hence, for the next five years, wage cost will grow in line with general inflation levels. The other components of costs are fairly stable on per tonne basis and high production growth will give operating leverage, thereby improving margins.

Valuation and outlook

Though government intervention in pricing and proposed profit sharing of 26% under MMRDA bill continue to remain the key overhang, CIL is moving towards higher trajectory of volume and pricing growth compared to past three years, which will re-rate the stock. At the CMP of INR325, CIL is trading at 10.5x PE and 5.7x EV/EBITDA on FY14e basis. We reiterate a BUY with a target price of INR387 at 6x FY15e EV/EBITDA.

Source : Equity Bulls

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