Angel Broking: Subscribe to Coal India IPO -Co(a)llateral growth

Coal India (CIL), a Navratna company, is the world’s largest coal producer.
The company accounts for nearly 82% of India’s total coal production. At the
lower and upper price band, the stock will trade at 5.8x and 6.7x FY2012E
EV/EBITDA, respectively. We recommend Subscribe to the issue with a DCF-based
fair value of `294.

Enjoys largest reserves and production base: CIL has the world’s largest coal
reserves, at 19bn tonnes, as per JORC’s guidelines. The company’s proved
reserves stand high at 11bn tonnes, constituting 56.2% of its total reserves. CIL,
the biggest coal producer globally, produced 431mn tonnes of coal in FY2010.
Demand outpacing supply: We expect CIL’s coal production to grow at a 5.7%
CAGR over FY2010–15E. However, India will continue to be a net importer of
coal as domestic demand is likely to grow at a 9–10% CAGR over FY2010–15E.
Significant leeway to increase prices: CIL sells raw coal at a ~63% discount to
global prices. We expect blended realisations to increase at a 6.1% CAGR over
FY2010–15E on account of a) a 5.1% CAGR increase in raw coal’s notified price
over FY2010–15E, b) increased proportion of beneficiated coal sales (8.8% in
FY2015E v/s 3.7% in FY2010), which commands a ~120% premium over the
notified coal price and c) gradual increase in e-auction sales volumes from 11.6%
in FY2010 to 12.5% in FY2012E, where realised price is likely to be ~60% higher
than the notified price.
Competitive cost structure: CIL is one of the lowest-cost coal producers in the
world, with an average blended cost of US $16/tonne. This is because CIL’s
production from open cast mining, which has significantly lower production cost
(US $11/tonne), accounts for 90% of its total production cost as compared to
underground mining, which has a high production cost of US $59/tonne.
Key risks to CIL’s earnings and our estimates: 1) Regulatory hurdles causing a
delay in production ramp-up; 2) infrastructure bottlenecks; 3) amendments in the
mining policy, which require sharing of profits; and 4) ongoing environmental
debate on ‘Go/No Go’ regions.