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Coal India – 1HFY2011 Result Update
Angel Broking recommends a Neutral on Coal India.
Top-line growth led by higher prices: Coal India’s 1HFY2011 top-line grew
16.8% yoy to `23,608cr on the back of the 11% price hike witnessed in
October’10. Average realisation increased 13.5% yoy to `1,180/tonne. However,
sales volume grew by a mere 2.94% yoy to 200mn tonnes, while production was
flat at 185.7mn tonnes. While production volume was lower by 9.0% than
budgeted, sales volume was lower by 10.7% than the budgeted sales volume
Price increase boosts EBITDA and net income: EBITDA margins expanded by
431.6bp to 20.7% as EBITDA increased by 47.5% yoy to `4,896cr. EBITDA/tonne
surged 43.3% yoy to `245/tonne. While staff cost and contractual expenses
increased 17.2% (`9,118cr) and 29.7% yoy (`2,067cr) respectively, overburden
removal expense declined 42.7% yoy to `778cr. Other income moved up 9.5%
yoy to `2,335cr. Consequently, net income clocked 29.1% yoy growth to
`4,020cr. Cash and cash equivalents at the end of the quarter stood at `397bn.
Aggressively scouting for acquisitions: CIL is aggressively looking to acquire coal
assets in Australia, Indonesia and US. It is in advanced stages to buy a stake in
Peabody (Australia) for AU $200mn. CIL is also in talks with Massey Energy
(fourth largest coal company in the US), which has reserves of 2.3bn tonnes.
Outlook and valuation: At the CMP, the stock is trading at 12.8x FY2011E and
9.4x FY2012E EV/EBITDA. While H2FY2011 is expected to be better on account
of higher volume growth, given the sharp rally since listing (30.6% in one month),
we recommend Neutral on the stock.
Investment rationale
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 at a high 11bn tones and constitute 56.2%
of its total reserves. CIL, the biggest coal producer globally, produced 431mn
tonnes of coal in FY2010.
Domestic demand outpacing supply
Demand is expected to increase at 10.6% CAGR over FY2010–15 as the power
sector, which accounts for nearly 75% of the total coal demand, is likely to see
exponential growth, as ~60MW of thermal capacity gets added over the period.
With production expected to witness 8.6% CAGR over the same period lagging
demand, India will structurally remain deficient in coal, thus placing CIL in
favourable position. We expect CIL’s coal production to post 5.7% CAGR over
FY2010–15.
Significant leeway to increase prices
CIL sells raw coal at ~63% discount to the global prices. We expect blended
realisations to increase at 6.1% CAGR over FY2010–15 on account of: a) the 5.1%
CAGR increase in raw coal’s notified price over FY2010–15, b) increased
proportion of beneficiated coal sales, which commands ~120% premium over the
notified coal price, and c) gradual increase in e-auction sales volumes from 11.6%
of raw coal sales in FY2010 to 12.5% in FY2012, where the realised price is ~60%
higher than the notified price.
Competitive cost structure
CIL is one of the lowest-cost coal producers in the world, with an average cost of
US $16/tonne. This is because CIL’s production from the open cast mines has
significantly lower production cost (US $11/tonne) and accounts for 90% of its total
production as compared to underground mines, which have higher production
cost of US $59/tonne.
Investment rationale
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 at a high 11bn tones and constitute 56.2%
of its total reserves. CIL, the biggest coal producer globally, produced 431mn
tonnes of coal in FY2010.
Domestic demand outpacing supply
Demand is expected to increase at 10.6% CAGR over FY2010–15 as the power
sector, which accounts for nearly 75% of the total coal demand, is likely to see
exponential growth, as ~60MW of thermal capacity gets added over the period.
With production expected to witness 8.6% CAGR over the same period lagging
demand, India will structurally remain deficient in coal, thus placing CIL in
favourable position. We expect CIL’s coal production to post 5.7% CAGR over
FY2010–15.
Significant leeway to increase prices
CIL sells raw coal at ~63% discount to the global prices. We expect blended
realisations to increase at 6.1% CAGR over FY2010–15 on account of: a) the 5.1%
CAGR increase in raw coal’s notified price over FY2010–15, b) increased
proportion of beneficiated coal sales, which commands ~120% premium over the
notified coal price, and c) gradual increase in e-auction sales volumes from 11.6%
of raw coal sales in FY2010 to 12.5% in FY2012, where the realised price is ~60%
higher than the notified price.
Competitive cost structure
CIL is one of the lowest-cost coal producers in the world, with an average cost of
US $16/tonne. This is because CIL’s production from the open cast mines has
significantly lower production cost (US $11/tonne) and accounts for 90% of its total
production as compared to underground mines, which have higher production
cost of US $59/tonne.
Outlook and Valuation
At the CMP, the stock is trading at 12.8x FY2011E and 9.4x FY2012E EV/EBITDA.
While H2FY2011 is expected to be better on account of higher volume growth,
given the sharp rally since listing (30.6% in one month), we recommend Neutral
on the stock.
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