>COAL INDIA LIMITED: More coal is the goal as FSA clarity emerges…

We expect Coal India Ltd (CIL) to turn the tide of flat production growth during past three years and achieve higher coal production and sales with a CAGR of 5% and 5.6% respectively during FY12-15E. We believe that the market at present is not willing to factor in CIL’s ability to increase production as well as prices and seems to have remained overly concerned over issues related to FSA signing and reduction in e-auction coal volumes. We expect this perception to change going forward and expect net sales and EBITDA CAGR of 8.8% and 13.6% during FY12-15E. Valuations appear attractive to us with a huge cash balance (~25% of market cap). We initiate BUY with a target price of Rs395.


■  Production at an inflection point, we expect smart up move from here: After flat production growth during FY10-12, we believe the production is at an inflection point and expect production CAGR of 4.6% during FY12-17E. We expect higher production on the back of i) increased capacity utilization at several coalfields and faster approvals for new projects as well as capacity expansions at existing mines. We see FY13E/14E coal production of 458/481 MT respectively.


■  FSA signing - a blessing in disguise and would lead to higher dispatches: We see the forced FSA signing (as enforced through Presidential directive) as a blessing in disguise for CIL. We believe that market perception and concerns on FSAs have been overdone for long. In our view FSA signing would give the necessary push to CIL to produce and sell more. Also, with the penalty clause becoming practically non-existent after CIL’s board meeting on April 16, 2012, we see the present FSA situation as a win-win for CIL. We expect CIL sales volume to
reach ~546 MT by FY17E (CAGR of 4.7%). We see ~7% sales growth in FY13E to 463 MT supported by better railway logistics. We expect e-auction sales to remain constant at ~48.5 MT over the next three years.


■  Shift to GCV based pricing positive, price increase matters the most now: We see the shift to GCV based pricing as a positive and expect 4% price increase each in FY13E & FY14E from Coal India on the new GCV based price list.


■  Low cost open cast operations remain key strength: Low cost and open cast (90% of overall mining) operations continue to remain the key strength and earnings driver for the company. Wages have been hiked by ~25% and we expect stable employee cost/tonne from FY13E onwards as the number of employees drop and production increases.


■  Valuations – attractive, initiate with a Buy: We see CIL stock trading at attractive valuations with FY14E adj. EV/EBITDA of 5.6x and FY14E adj. P/E of 10.4x. With increasing comfort on higher volumes going forward and expected price increase, we value the stock at 7x FY14E adj. EV/EBITDA (~15% premium to global peers) to arrive at a fair value of Rs395 for the stock. Our DCF valuation fair value stands at Rs363. We initiate buy with a target price of Rs395.


■  Key Risks: Flat to negative production growth, lower sales volumes due to logistics constraints, lower e-auction volumes for meeting FSA quantities and price increase not allowed by the government.


RISH TRADER