COAL INDIA LTD: A NAVRATNA FOR EVERY PORTFOLIO !!!

Scrip Code: 533278 / COALINDIA

CMP:  Rs. 319.15; Buy at every dips.
Medium to Long term Target – Rs. 355; STOP LOSS – Rs. 293.00; Market Cap: Rs. 2,01,586.76 Cr; 52 Week High/Low: Rs. 386.25 / Rs. 289.40

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. 13.77; Div: 100 % ; P/E: 23.13 times; Ind P/E: 15.73; EV/EBITDA: 22.57.

Total Debt: Rs. 1173.54 Cr; Enterprise Value: Rs. 1,37,760.30 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 Banpu Public Company Ltd of Thailand; Blackgold International Holdings Ltd of China; Agritrade Resources Ltd of Hongkong;  PT Sumber Energi Andalan Tbk of Indonesia, Siberian Mining Group Company Ltd & Mongolia Energy Corporation Ltd of Hong Kong.

Investment Rationale:

Coal India, a ‘Navratna’ company, is the largest coal producing company in the world, based on its raw coal production. The company is also the largest coal reserve holder in the world, based on its reserve base. CIL is well positioned to capitalize the widening gap of demand & supply as it controls 80 % of the coal supply in India and around 66% of India’s power generation is coal based. CIL reported Q3FY13 consolidated net sales at Rs. 17,325 Cr, up by 13% YoY & by 18.8% QoQ. This was led by volume off take of 120.45 million tons in Q3FY13, up by 9.23% YoY & by 15.37% QoQ. Average realizations remained flat at Rs. 1438 per tn, up by 0.09% QoQ and 3.05% YoY. Volume growth was driven by inventory liquidation of 3.08 mn tons in Q3FY13. CIL volume mix was largely directed towards Fuel Supply Agreement (FSA), which contributed 87.67% of total volumes in Q3FY13 (85% in Q2FY13). Realization in case of FSA stood at Rs. 1232 per tn, improving by 5.94% YoY & down 3.8% QoQ. E-auction volumes stood at 9% of the total mix with realization per ton at Rs. 2941, up by 3.12% YoY (19.6% QoQ). Volume contribution from washed coal was at 3.29% of total volumes with realization/tn at Rs. 2491, up by 19.25% YoY & 19.07% on QoQ basis. EBITDA margin contracted 4.92% YoY to 24.75%, led by high employee, power and fuel expense. EBITDA/tn stood at Rs. 365.3 in Q3FY13 vis-à-vis Rs. 414 in Q3FY12 & Rs. 282 in the sequential quarter. This was mainly due to high employee expenses which increased by 12.33% to Rs. 537.18/tn YoY. PAT margin expanded 908 bps YoY to 16.89% (14.83% QoQ) aided by a sharp decline in depreciation expense (down by 24.21% YoY. The Cabinet Committee on Economic Affairs (CCEA) has given in principle approval to the price pooling mechanism wherein the prices of domestic and imported coal will be averaged to get a uniform price for coal in the country. CCEA however has not given the actual terms of this mechanism and has asked the coal and power ministries to come out with the detailed terms and specifications of how the price must be determined. Currently, CIL has FSA's with power companies without price pooling basis and it supplies imported coal at a cost plus basis.

Outlook and Valuation:

Coal India (CIL) production in 9MFY13 stood at 308.91 mn ton, up by 6.06% YoY, while off-take at 335.23 mn tn was up by 8.05% YoY. Transportation infrastructure has been improving for the company, as rake availability was 177 rakes a day in 9MFY13, up by 10.62% YoY. The share of railways (transports ~1.5 mn tons of coal everyday) in the transportation mix is ~ 52% and is expected to rise to 58% by FY17. Coal India plans to take a proposal for setting up a Rs. 9,000 Cr power plant in Odisha to its board for approval in next couple of months. Also Coal India is changing its appraisal system in order to attract the best of the talent. The company has roped in Manpower Group the world’s largest human resource management firm to implement a performance related pay system which will be effective from April 2013. On the back of increased coal production, higher FSA realisations, intact e-auction volumes, increased availability of rakes and FSA issue are about to resolve and it is expected that CIL's revenue & net profit can register a good growth over FY13 and FY14E. The current expansion in off-take reinforces company’s ability to achieve its guided off-take target of 487m (+6%) tonnes in FY14. Achievement of targets would ease the concerns on CIL’s ability to increase prices, going forward. However, it can be assumed that there can be marginal increase in realisations by 2% in FY14 given the election year. With a huge cash pile of around Rs. 65,000 the company looks for overseas acquitions and can mull about buyback of shares or for a special dividend. In my view CIL could report FY13E EPS of Rs. 26.10/sh and for FY 14E of Rs. 27.90/sh. Valuing the stock at 8.70x FY2014 EV/EBITDA, the stock could be bought for the target price of Rs. 355 and recommend Accumulate on the stock.

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (Rs. Crs)	62,415.40	67,415.10	67,378.60	72,766.90
NET PROFIT (Rs. Crs)	14,726.30	16,459.70	17,618.50	19,932.20
EPS (Rs.)	23.30	26.10	27.90	31.60
PE (x)	15.60	14.00	13.00	11.50
P/BV (x)	5.70	5.10	4.50	4.10
EV/EBITDA (x)	11.10	9.70	8.70	7.20
ROE (%)	39.90	38.30	36.70	37.10
ROCE (%)	36.20	34.90	33.40	33.90

I would buy COAL INDIA LTD with a price target of Rs. 355 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. 293.00 on your purchase.

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