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Subscribe to Coal India IPO - Elara Capital
Posted On : 2010-10-16 09:28:13( TIMEZONE : IST )
IPO note on Coal India by Elara Capital
- Coal India
- Recommendation: Subscribe
- Price band: INR 225-245
- Issue size: INR142-155bn
- Opening date: 18 October 2010
- Closing date: 21 October 2010
The Government of India will divest ~10% stake in Coal India Ltd (CIL) by issuing 631.6mn shares to the general public. Post issue, the stake of the Indian government will come down to ~90%. The issue is the first step towards raising INR400bn target set for disinvestment in FY11 as it is expected to fetch around INR142bn-155bn through the process.
Company background
CIL is the largest coal producer as well as the largest coal reserve holder in the world. The coal produced by the CIL accounted for ~82% of the total coal production in the country. As of now, the company sells raw coal while the beneficiated coal accounts for ~3.4% of its total volume sales. Average realizations for the company for raw coal are at a discount to its global peers. CIL enjoys a strong balance sheet with cash of ~INR61/share as of end FY10. We expect CIL to benefit from the favorable demand supply equation in the country.
CIL holds the largest coal reserves in the globe. As of April 1, 2010, it had total coal resources of 64,786mn tonnes, comprising of Proved Geological Reserves of 52,546mn tonnes, Indicated Geological Reserves of 10,298mn tonnes and Inferred Geological Reserves of 1,942mn tonnes (See Exhibit 4 for reserves summary). CIL has extractable coal reserves of 21.7bn tonnes. Considering the current rate of production, the resources would last for more than ~145 years.
Key Strengths
Strong reserve base – As stated earlier, CIL holds the largest reserve base in the world. The reserves have a very long life and at the current rate of production, these would last for more than 145 years. Even with expanded production targets, reserves would last ~100 years. Of the current reserve base in the country, nearly 90% of the mines (by volume) are operational, lessening the risks of increasing environmental hazards and other related hindrances. Besides holding strong reserves, CIL is also focusing on acquiring coal assets outside of India. It has already acquired prospecting licenses for two coal blocks in Mozambique.
Favorable demand supply equations augur well
In FY09, there was a shortage of ~11% of coal consumed in India which was filled by imports. Quantitatively speaking, the estimated coal shortfall would be 83.3mn tonnes, of which the shortfall of coking and non-coking coal is expected to be 42.48mn tones and 40.85mn tones, respectively.
Valuation & Recommendation
The price band fixed for the issue is INR225-INR245 at which CIL is valued at ~5.4 – 6.1x FY12E EV/EBITDA. The global peers in the space are trading at an average EV/EBITDA of 7x FY12E. Valuing the company at 7x FY12E EV/EBITDA, we arrive at a valuation range of INR 265 -275/share, warranting an upside of ~8 – 12% in the stock in the medium term. We have not used reserves based valuation considering the fairly long life of the reserves life and the muted production growth guidance (~6% YoY) given by the management.
We believe, the medium term investors should not focus on realization improvements and volume growth. We believe improvement in realizations will be difficult to implement considering the inflation concerns and possibilities of government interference. However, going by the significant asset size, quality and life of the reserves and the dominance in the domestic market, we believe, CIL has very good prospects in the long term.
