IPO NOTE
Coal India — Black Diamond
Coal India — Black Diamond
We expect 5% volume CAGR over FY10-13E, driven by power demand and mining capacity expansions
Coal India (CIL) has 25 projects with 47.5mtpa capacity expected to come up by end-FY12, while another 20 projects, with 33mtpa capacity are expected to be operational during XIIth Five Year Plan (2013-2018). CIL’s track record of meeting targets has historically been good, and we expect 5% volume CAGR over FY10-13E, driven by demand from the power sector. A more long-term growth driver will be 20 coal beneficiation facilities, with an aggregate feedstock capacity of 111mtpa, to be completed during the XIIth Five Year Plan.
We expect ~6% annual rise in realisations, aided by price increase and sales mix enhancement
Currently ~24% of CIL’s sales volume is through non-fuel supply agreements (FSAs). Selling more volumes through MoUs with customers as well as selling beneficiated coal rather than the raw variety would be positive for realisations and profitability. Through a combination of price increase on FSAs and sales mix enhancement, CIL should be able to register average realisation increase of ~6% p.a.
Profit sharing provision has an adverse impact on valuations
The profit sharing proposal of the draft MMDR Bill would adversely affect mining companies, including CIL. We believe that while clarity on the implementation is awaited, the profit sharing proposal is likely to come into force – albeit in a more diluted form. In our opinion, a consensus is likely to be reached at ~10% (compared with the current provision of 26%), and have factored this into our valuations.
Issue price of Rs245 (high end of price band) offers 22% upside
We apply a 1-year forward multiple of 8.0x considering: 1) multiple of global peers with similar margins (we adjust for the impact of Overburden Removal provisioning done by CIL); and 2) CIL’s financials are less exposed to volatility of the commodity cycle, and hence deserves a premium. This suggests a value of Rs300 (September 2011). The issue price of Rs245 offers 22% upside and we recommend SUBSCRIBE. Risks include slower-than-expected capacity expansion, and lower-than-estimated price hikes in FY12E and FY13E.
Coal India (CIL) has 25 projects with 47.5mtpa capacity expected to come up by end-FY12, while another 20 projects, with 33mtpa capacity are expected to be operational during XIIth Five Year Plan (2013-2018). CIL’s track record of meeting targets has historically been good, and we expect 5% volume CAGR over FY10-13E, driven by demand from the power sector. A more long-term growth driver will be 20 coal beneficiation facilities, with an aggregate feedstock capacity of 111mtpa, to be completed during the XIIth Five Year Plan.
We expect ~6% annual rise in realisations, aided by price increase and sales mix enhancement
Currently ~24% of CIL’s sales volume is through non-fuel supply agreements (FSAs). Selling more volumes through MoUs with customers as well as selling beneficiated coal rather than the raw variety would be positive for realisations and profitability. Through a combination of price increase on FSAs and sales mix enhancement, CIL should be able to register average realisation increase of ~6% p.a.
Profit sharing provision has an adverse impact on valuations
The profit sharing proposal of the draft MMDR Bill would adversely affect mining companies, including CIL. We believe that while clarity on the implementation is awaited, the profit sharing proposal is likely to come into force – albeit in a more diluted form. In our opinion, a consensus is likely to be reached at ~10% (compared with the current provision of 26%), and have factored this into our valuations.
We apply a 1-year forward multiple of 8.0x considering: 1) multiple of global peers with similar margins (we adjust for the impact of Overburden Removal provisioning done by CIL); and 2) CIL’s financials are less exposed to volatility of the commodity cycle, and hence deserves a premium. This suggests a value of Rs300 (September 2011). The issue price of Rs245 offers 22% upside and we recommend SUBSCRIBE. Risks include slower-than-expected capacity expansion, and lower-than-estimated price hikes in FY12E and FY13E.
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