Religare: Coal India IPO: invest

Coal India Ltd
Best play on India’s rising coal deficit
Coal India (CIL) commands a dominant 82% market share in India and hence
offers the best play on the rising coal deficit in the country. Over the next three
years, we expect CIL to register substantial expansion in operating margins from
22% in FY10 to 30% in FY13 led by improved labour efficiency, a focus on
beneficiated coal and technology upgrades. This, in turn, would likely drive a PAT
CAGR of 18% over FY11-FY13. We value CIL at between 7–9x FY12E EV/EBITDA,
at which the stock would be priced in the range of Rs 265–315/sh (Rs 1,6165bn–
1,993bn). Key upside risks to our estimates include cash deployment towards
further improving operational efficiencies and for international acquisitions,
better pricing parity with imports, and a faster turnaround in subsidiaries (ECL
and BCCL). Key downside risks are delays in land acquisition, inability to meet
minimum contracted quantity (MCQ), and transport infrastructure bottlenecks.
CIL to help alleviate coal deficit: We believe the supply-demand gap for coal in
India could widen from 23mmt in FY10 to 79mmt by FY15. Our bottom-up
analysis shows that India’s overall demand could grow at a CAGR of 12.5% to
1,091mmt by FY15, and that the power sector alone could account for 80% of the
incremental demand. Overall, the incremental demand for coal in India is
estimated at 487mt by FY15. Of this, 161mmt or 32% is likely to come from CIL
(for details refer to our report titled Captive coal to partly bridge supply gap dated
15Sep10).
Strong operational performance ahead: We expect CIL to deliver a robust
operational performance over FY11-FY13, with sales likely to grow at a 12%
CAGR (10.9% during FY06-FY10) and a significant improvement in EBITDA
margin from 22.1% in FY10 to 30% in FY13. Margin expansion will be
supported by improved labour efficiency, subsidiary turnaround, focus on
beneficiated coal and upgrades to execution technology.
Robust balance sheet but volatile earnings: CIL’s net profit has grown at a CAGR
of 13% over FY06-FY10 while ROE, which decreased steadily from 42% in FY06 to
27% in FY09, has rebounded sharply to 44% in FY10. We expect the company to
surpass its past growth rates and report a net profit CAGR of 18% over FY11-FY13,
with ROE settling in the range of 31–39% (on account of non-utilisation of cash).
CIL has cash of Rs 369bn on its books which could be used for future expansion
plans and international acquisitions, thereby further bolstering ROE. In addition, a
net worth of Rs 258bn would qualify the company for global project bids.
We value CIL in a range of 7–9x EV/EBITDA: Global coal companies are trading
in the range of 5–13x EV/EBITDA and 9–14x P/E on CY11E. At 7–9x EV/EBITDA
and 11–13x P/E on FY12 estimates, we arrive at a price band of Rs 265–315/sh
for CIL. Triggers for a stock re-rating include any increase in raw coal price,
international acquisitions, cash deployment and faster subsidiary turnaround.