Visit http://indiaer.blogspot.com/ for complete details Objects of the offer
The objects of the offer are to carry out the divestment of
63.16 crore equity shares by the selling shareholder and to
achieve the benefits of listing the equity shares on the stock
exchanges. Coal India Ltd (CIL) will not receive any proceeds
from the offer and all proceeds shall go to the selling
shareholder.
Company background
CIL, a state-owned company, is the largest national coal
mining company in India in terms of coal reserves and
production. It had total coal reserve of around 64,785 million
tonne as on April 1, 2010. In FY2010, the company produced
431 million tonne of coal, which is around 81% of the country’s
total coal production. As of March 31, 2010, CIL operates
471 mines in 21 major coalfields across eight states in India,
including 163 open cast mines, 273 underground mines and
35 mixed mines (covers both open cast and underground
mines). The company also operates 17 coal beneficiation
facilities with an aggregate designed feedstock capacity of
39.40 million tonne per annum.
Key positives
To cash in on the acute shortage of coal
CIL is one of the largest companies in the world based on
the coal reserves of 64,786 million tonne as on April 1, 2010
(including proved reserves of 52,546 million tonne, indicated
reserves of 10,298MT and inferred reserves of 1,942 million
tonne). The company produced 431.3 million tonne of coal
in FY2010, which is 7% higher than the FY2009 coal output
of 403.7 million tonne, and accounted for 81% of the country’s
total coal production.
Coal is primarily used in three sectors, power, steel and
cement, with the power sector alone consuming around 77%
of the non-coking coal produced in India. With these three
sectors taking giant steps to expand capacities, the demand
for coal is expected to grow at a compounded annual growth
rate (CAGR) of 11% over FY2010-12. However, the coal
production in the country is expected to grow at a much
lower rate of 6% per annum over the same period and India
is lacking sufficient port handling capacities which will limit
the import of coal. This will lead to a huge demand-supply
mismatch for coal in India.
Key concerns
Infrastructure constraints
In our view, India faces a problem of poor logistics and
infrastructure facilities, and we believe that it is the major
reason suppressing the coal production in India. With coal
reserves concentrated in the eastern region of the country,
where the logistic facilities are inadequate, the issues have
increased for the coal industry.
CIL uses a combination of rail and road transportation to
deliver coal to its customers. Non-availability of adequate
road transportation could adversely affect the company’s
sales volume and thus its profitability going forward.
Delays due to regulatory affairs
Globally, coal mining projects take around five to six years
to get commissioned. However, in India the normal timeline
for commissioning of coal blocks is far higher at 8-12 years
when compared to the international benchmarks. This is
mainly due to delays in obtaining the regulatory approvals
(environment and land clearance) at multiple stages from
various agencies.
Larger reserve of India’s non-coking coal is of low grade
The majority of non-coking coal reserves in India are of
low grade and hence the price of coal is also cheap. The
price of the non-coking coal produced by CIL is almost 60-
70% lower than that of its Asian peers.
Coal bearing forest demarcating proposal to hit CIL
The government has recently made a proposal to demarcate
certain coal-bearing forest areas in India into two
categories: areas where coal-mining activities will be
permitted and areas where coal-mining activities will not
be permitted. A recent study by coal and environment
ministries indicates that around 48% of the total coal mining
area falls in the category where coal-mining activities may
not be permitted. If the government’s proposal is passed
and coal-mining activities in these areas are prohibited
then it could adversely affect CIL’s coal reserves and
production, and thus its earnings outlook also. However,
given the serious shortage of coal in India, the limited port
handling capacities for coal imports and the large number
of coal-based power projects coming up in India, India would
require strong domestic production from CIL.
CIL is a quality public sector unit that is well positioned to
exploit the growing demand-supply gap for coal in India
due to its huge reserves, strong balance sheet and
initiatives taken to improve the consistency of output
(through investment in coal washeries). On a rough-cut
basis, we expect the company to show an earnings growth
of over 20% in the next three years.
At the offer price band of Rs225-245 the stock is offered at
14.5-16x FY2010 earnings which appears attractive for a
company that has strong earnings growth outlook, high
return ratios (return on equity [RoE] and return on capital
employed [RoCE] in excess of 30%) and a high level of cash
on the books.
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