Accumulate Coal India, traget Rs 366:: Prabhudas Lilladher,

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 Indian coal markets in severe deficit: We expect severe deficit in the domestic coal
market owing to an increase in the domestic supplies incommensurate with strong
demand growth. Domestic supplies would grow at a CAGR of 7.2%, significantly
below the growth of 8.9% in demand during FY11-FY17. Reflecting the same, the gap
between demand and domestic supplies would grow at a CAGR of 19% during FY11-
FY17 to 230m tonnes in FY17 against 68m tonnes in FY10.



 Coal India (CIL) commands more than 80% share of domestic supplies: Backed by
sizeable operations and regulated domestic market, CIL commands share in excess
of 80% of the domestic supplies. It would continue to control ~72% of the domestic
supplies despite higher contribution from captive coal blocks and higher base.

 Consistent earnings growth and decent return ratios substantiate stock’s
attractiveness: We expect EBITDA and PAT to grow at CAGR of 19% and 17%,
respectively, during FY11-FY13. Even on a longer time horizon of FY11-FY17, both
EBITDA and PAT would grow at CAGR of 17% each. Despite the sizeable idle cash in
the balance sheet, CIL would generate RoE and RoCE in excess of 25% on the back of
higher realisations and increased capital expenditure to fuel the growth.

 Valuation: We valued the stock at Rs366 based on DCF with FY11-FY17 as period for
our explicit forecasts and assumptions of derived cost of equity at 12.1% and
terminal growth of 3.5%. This implies P/E (based on pure operational earnings) of
15.5x and 13.0x FY12E and FY13E, respectively and EV/EBITDA of 11.0x and 9.3x
FY12E and FY13E, respectively, at a premium to global valuations. We strongly
support the premium in valuations for the stock, given its strong presence in the
deficit market, stable earnings, strong balance sheet and attractive return ratios. We
initiate coverage with a ‘Accumulate’ rating on the stock.