COAL INDIA : A ‘Maharatna’ company, a gem for your Portfolio !!!

Scrip Code: 533278 / COALINDIA

CMP:  Rs. 376.65; Buy at Rs. 360 to 375 levels & Accumulate at Every Dips.
Medium to Long term Target – Rs. 395; STOP LOSS – Rs. 345.00; Market Cap: Rs. 2,37,905.86 Cr; 52 Week High/Low: Rs. 387.45 / 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. 30.97; Face Value: Rs. 10.00; EPS: Rs. 12.82; Div: 100 % ; P/E: 29.37 times; Ind P/E: 18.76; EV/EBITDA: 13.50.

Total Debt: Rs. 1173.54 Cr; Enterprise Value: Rs. 2,54,612.64 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. The company provides Washed and Beneficiated coal for use in manufacturing of hard coke for steel making and power generation. 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, Bharat Coking Coal India Ltd, Central Coalfields Ltd, Northern Coalfields Ltd, Western Coalfields Ltd and South Eastern Coalfields Ltd. 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 offers coking coal primarily for use in steel making & metallurgical industries, and for hard coke manufacturing, semi coking coal for use as blend able coal steel making, merchant coke manufacturing, it 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. Coal India is compared with PT Sumber Energi Andalan Tbk of Indonesia, Siberian Mining Group Company Ltd & Mongolia Energy Corporation Ltd of Hong Kong.

Investment Rationale:

Coal India, a ‘Maharatna’ company & is the largest coal producing company in the world, based on its raw coal production (436 million tonne in FY2012). The company is also the largest coal reserve holder in the world, based on its reserve base. The company caters to large thermal power generation companies, steel and cement producers and other industrial companies in the public and private sector. CIL has access to 64.3 billion tons of reserves, the largest in the world. From this 52.4 billion tons are based on Indian Standard Procedure (ISP) guidelines, representing 6 % share of the global proven reserves. CIL is well positioned to capitalize the widening gap of demand & supply as it controls 80 % of the coal supply in India. CIL was been facing problems for its planned expansion, due to delays in requisite environment and forest clearances and land acquisition issues. During FY2012, CIL’s production has been affected by imposition of stringent environmental & pricing laws by regulatory authorities. However, looking ahead, given the rising demand-supply gap for coal in India, it is expected to see some ease from the government on the environmental side which will drive CIL’s production and sales growth. Gross Caloric Value -based pricing will offset high staff costs. CIL’s realizations were higher by 6.8 % YOY during 1QFY2013 on the back of change in pricing mechanism to GCV. Going forward, it is expected that the blended realizations to increase by 7.1 % in FY2013, which is expected to offset the increase in staff costs. Coal India plans to spend nearly Rs. 40,000 Cr over 5 years to 2017, plan includes development of more than 100 coal mine projects, setting up coal washeries & acquisition of coal blocks overseas. Currently, Coal India has lined up a capex of Rs. 25,400 Cr for the next 5 year period that ends on 31st March 2017, company also plans to spend additional Rs. 2,500 Cr to set up a 300  km railway infrastructure in Chhattisgarh, this line will  help to evacuate 120 million tonnes of additional coal. COAL INDIA is in talks with Railways & state to lay three new railway lines in Chhattisgarh, Jharkhand and Orissa to overcome evacuation problems. The company reported Cash and Bank Balances of Rs. 58,202 Cr as on 31st March 2012 from which COAL INDIA's massive capex will be easily met along with the Buy Back if it happens.    

Outlook and Valuation:

Coal India (CIL) reported lower Q1FY13 earnings on account of lower than expected realisations from the E-auction. Also, with the expansion in Fuel Supply Agreement realisations where further boosted by increase in the WCL prices and the low employee costs in the quarter reinforcing the positive outlook for earnings in coming quarters. The CIL's Board has cleared the cost plus model for Fuel Supply Agreement ( FSA - As per new Coal Distribution Policy, Coal supplies are governed by Legally enforced agreement between the coal companies & the consumer under specific terms & conditions) with the power companies but asked the coal major's management to come up with a business model for price pooling mechanism. The cost plus model provides imported coal at its actual cost & Price pooling is mechanism to implement FSA, suppose there is no price pooling, FSA will be like 65 % domestic coal & 15 % imported coal provided the power producers are willing to take it, suppose if pooling prices is approved, then the 15 % would be at pooled price and not at the cost price - this new business model would deal with the impact of taxation on coal imports, price of coal and legal implications of pooling mechanism. As per the presidential directive, CIL has to meet 80 % trigger level and CIL had agreed to pay penalty of 1.5 % to 40 % on failing to supply the committed quantity of coal to the power utilities, following protests from major companies over its decision to go for worthless penalty of o.01 %. Coal India if gets timely clearances and additional capex is spent then the company would surpass 2012-17 production target of 615 million tonnes. Coal India has achieved 98 % of its production target and 97 % of offtake target during the 5 months (April- August) of the current financial year. The monsoon effected the mining operations which prevented the company from achieving its target. The company mined 162.86 million tonnes during first 5 year v/s 152.49 million the same month in the previous year. Company's offtake has seen a rise of 5.4 % at 181.85 mt during April-August 2012 against 172.48 mt last year. However CIL met 91 % of the underground output target at 15.69 million tonnes during April-august, which is 0.3 % down from 15.74 million tonnes in same period previous year. Now, on Results - CIL’s Revenue grew by 14 % YoY at Rs. 16,500 Cr on the back of 6.4 % growth in volumes at 113m tonnes and 7 % rise in realisations at Rs. 1,465/tonne. The variance was primarily on account of lower-than-expected realisations in E-auction at Rs. 2,561/tonne, partially off-sated by better realisations in FSA at Rs. 1,267. CIL reported EBITDA at Rs. 4,810 Cr YoY. Coal India’s EBITDA/tonne for the quarter fell 6 % to Rs. 427. Profit after Tax grew by 8.3 % to Rs. 4,480 Cr on the back of 32 % rise in other income and 100bps fall in tax rate at 29.4 %. CIL’s 1QFY2013 results surprised positively due to lower-than-expected staff and other costs. Further, it remains well-poised to meet its FY2013 off take target with 6.5 % YOY increase reported in 1QFY2013. Moreover, an increase in blended realization due to shifting to GCV-based pricing is expected to offset the rise in staff costs in FY2013. In my view CIL could report FY13E EPS of Rs. 25.30/sh and for FY 14E of Rs. 29.10/sh. Valuing the stock at 8.0x FY2014 EV/EBITDA, the stock could be bought for the target price of Rs. 415 and recommend Accumulate on the stock. I maintain a positive view on the stock & believe that any further correction due to COAL GATE scam would be a good buying opportunity for long term holders, as for short term, stock could be bought with a price target of Rs. 395.

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	50,229.30	62,415.40	67,378.60	73,021.90
NET PROFIT (Rs. Crs)	13,477.60	15,638.70	17,448.50	19,649.10
EPS (Rs.)	17.30	23.30	25.30	29.10
PE (x)	20.20	14.90	13.70	11.90
P/BV (x)	6.60	5.40	4.30	3.40
EV/EBITDA (x)	13.00	10.80	9.00	7.30
ROE (%)	36.90	39.90	34.70	31.70
ROCE (%)	33.30	36.70	32.20	29.70

I would buy COAL INDIA LTD with a price target of Rs. 395 for the short term and Rs. 435 for the 6 month target. 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. 345.00 on your purchase.

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