COAL INDIA : A HOT FAVORITE STOCK OF INVESTORS !!!

Scrip Code: 533278 / COALINDIA

CMP:  Rs. 341.20; Buy at Rs.320 - Rs. 330.
Short term Target: Rs. 370, 6 month Target – Rs. 410; STOP LOSS – Rs. 313.90; Market Cap: Rs. 2,15,514.35 Cr; 52 Week High/Low: Rs. 422.35 / Rs. 293.60

Total Shares: 631,63,64,400 shares; Promoters : 568,47,27,960 shares –90.00 %; Total Public holding : 63,16,36,440 shares – 10.00 %; Book Value: Rs. 30.77; Face Value: Rs. 10.00; EPS: Rs. 13.03; Div: 39 % ; P/E: 23.14 times; Ind. P/E: 19.08; EV/EBITDA: 42.21.

Total Debt: 1,370.43; Enterprise Value: Rs. 2,16,884.78 cr.

COAL INDIA LIMITED: CIL was incorporated in 1973 in Kolkata, India. It was formerly known as Coal Mines Authority Limited. CIL is a leading public sector undertaking engaged in coal mining & selling coal fines in India and is working on establishing its footprint globally through acquisitions. Company operates 471 mines in 21 coalfields across 8 states in India, which includes 163 open cast mines, 273 underground mines & 35 mixed mines – open & underground mines. CIL operates through its 9 wholly owned subsidiaries, of which 1 subsidiary is engaged in exploration and feasibility study analysis. Its subsidiaries include Eastern Coalfields Ltd (ECL), Bharat Coking Coal India Ltd (BCCL), Central Coalfields Ltd (CCL), Northern Coalfields Ltd (NCL), Western Coalfields Ltd (WCL) and South Eastern Coalfields Ltd (SECL). CIL has total reserves of 64.3 billion tons and proved reserves of 52.4 billion tons, of which extractable reserves stands at 21.7 billion tons. The company also provides middlings used by fuel plants, brick manufacturing units, cement plants, industrial plants, as well as for power generation. CIL coal fines/coke fines are used in industrial furnaces, as well as for domestic purposes. It serves primarily power, steel, cement, and fertilizer industries.

Investment Rationale:

Coal India signed an agreement with the five recognized union to hike 25 % wages till 2016 which is expected to add about Rs. 4,000 Cr to the company’s annual wage bill. The company has already made provision on wage for Rs. 333 Cr in Q3 FY12 which will take total employee cost to Rs. 5,622 Cr during the quarter. It accounted Rs. 750 Cr during Q2FY12 for the wage hike. CIL has shifted from Ultra Heat Value mechanism to Gross Calorific based value pricing mechanism which will be based on international pricing system. The company does not expects increase in price through the shift in price mechanism. However the application is in process and the company is likely to review on its pricing this April, this will likely to improve the profitability of the company. Investors are keenly watching the production data of CIL in the last quarter Q4. The company has target of 430mn ton for FY12 lower from its earlier target of 460mn tons due to bad weather condition and delay in land clearance. If the company will achieve this target it would be still lower than previous year’s output of 431.32mn tons. However, given the current rate, it seems difficult for the company to meet its target. In the first nine months of the current year the company’s production output was only 291.24mn ton as compared to 299.45mn tons in nine months of previous year. Prime minister office’s (PMO’s) recent announcement to increase the fuel supply agreement (FSA) trigger level from the earlier 50 % to 80 % for power sector this would warrant substantial expansion in CIL’s volumes. Subsequent to PMO’s announcement, it is expected that there will be speedy clearances for the projects (117 projects with capacity of 200mtpa) stuck due to hazy policies of MoEF like ‘Go, No-Go’ attitude. It is expected that the existing 5- 6 % CAGR growth trajectory of COAL INDIA to accelerate to 7 % - 8 % during the 12th Five year plan. Management at various forums guided that increased supplies to power sector would lessen its e-auction quantity from the existing 12 % to 8 % of the total quantity by the end of FY17. Given the highly profitable profile of e-auction, it would require CIL to take an increase of 4 % in realisation of its (excl. e-auction) volumes. The increase seems marginal in the light of the fact that CIL has not increased prices for the power sector (consumes 75 % of the volumes) during the last two and a half years. An increase in prices by 10 % - 12 % during Q4FY12 is expected from CIL which is enough to drive the EBITDA growth by 10 % - 12 % in FY13.

Outlook and Valuation:

During the quarter the company’s production grew marginally by 0.7 % Y-o-Y to 114.6mn ton compared to 113.7mn ton in Q3FY11 due to a day’s strike on account of bonus negotiation. Further, off take also declined by 0.1 % to 110.3mn ton compared to 110.4mn ton in previous year. This led revenue to grow only by 21 %Y-o-Y to Rs. 15,349.20 Cr in Q3FY12 v/s R. 12,686.70 Cr in Q3FY11 despite the volume growth and price hike in February last year. EBITDA grew by 33.6 % Y-o-Y to Rs. 4,542.10 Cr in Q3FY12 v/s Rs. 3,399 Cr in Q3FY’11. Despite steady off take, the company managed to improve its margins with low operational cost and price hike. Profitability grew by 54 % Y-o-Y to Rs. 4,037.70 Cr in Q3FY12. Coal India plans to pay Rs. 5,684.70 Cr as dividend to the government in 2011- 12 more than double the amount paid last fiscal. Backed by the 6 % growth in volumes and 5 % increase in blended realisations, CIL’s earnings are expected to grow at a CAGR of 15 % during FY12-14, despite sharp increase in the wage cost. On the basis of  DCF, assuming risk free rate of 9%, beta of 0.58 and assuming cost of equity at 12.7 % and terminal growth rate of 5.2 % on the future cash flows, I arrive at an intrinsic value of Rs. 360/share.

KEY FINANCIALS	FY11	FY12E	FY1E	FY14E
SALES (Rs. Crs)	50,233.60	59,420.20	65,569.40	71,237.50
NET PROFIT (Rs. Crs)	10,867.40	14,614.50	16,175.60	19,012.90
EPS (Rs.)	17.20	23.10	25.60	30.10
PE (x)	18.80	14.00	12.60	10.70
P/BV (x)	6.10	4.70	3.70	3.00
EV/EBITDA (x)	11.90	9.10	7.60	6.00
ROE (%)	36.80	38.00	32.90	30.90
ROCE (%)	33.20	35.10	30.70	29.10

I would buy COAL INDIA LTD with a price target of Rs. 370 for Medium to Long term and Rs. 410 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 313.90 on every purchase.
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