Coal India- Black Diamond – High (c)ash content : IIFL

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Black Diamond – High (c)ash content
With an 81% share of domestic coal production and growth limited by production rather than demand,
Coal India is the best play on the coal shortage in India. Helped by 10% revenue CAGR and efficiency
gains we expect 13% CAGR in free cash, from Rs83bn in FY10 to Rs195bn in FY17. With 75% production
sold on quasi-regulated prices, earnings are far less sensitive to global prices and are much less volatile.
CIL should hence trade at a premium to global coal mining peers who. Our DCF based fair value of Rs345
translates into FY12ii PER of 18.5x – a 6% premium to CY10 valuations of global peers. Upsides exist to
our estimates given company’s focus to increase production of washed and higher quality coal, which
are sold at market-linked prices. We initiate coverage with BUY, with a one-year target price of Rs345.

Coal India – a direct play on the domestic coal shortage: We expect the current coal shortage in India to
worsen, as demand CAGR of 10% over FY11-17 outstrips supply CAGR of 7.1%. Supply response would be
stymied by land acquisition, forest clearances and Naxal attacks. CIL is a direct play on this shortage. Post a 23%
profit CAGR over FY04-10, aided by a 6% CAGR in both production and prices, we forecast a 13% profit CAGR
over FY11-17ii. While production CAGR will sustain at 5.5%, the upside is from the increasing flexibility to link
larger proportion of its sales to global prices. Efficiency gain and manpower reduction further aid profit growth.

CIL should trade at a premium given low earnings volatility: Bulk of CIL’s production is sold at quasiregulated
prices, which provides a good downside cushion to earnings. At the same time, faster ramp-up in
production of beneficiated coal (sold at market-linked prices) compared to our assumptions, provides upsides to
our earnings estimates. At our target price of Rs345, CIL would trade at FY12ii PER of 18.5x – a 6% premium to
the CY10 valuations of global peers. Scarcity value could translate into a premium to our fair value for the stock.


Marginal impact of new mining regulation; IFRS-based accounting for OBR a negative: A liberal R&R
policy and already meaningful expenses towards CSR activities mean that the new mining tax proposal would
only have a marginal impact on CIL. However, accounting change for treatment of OBR charges would remove
the tax shield, resulting in an 11% decrease in FCF, while increasing the accounting profits by 20%. Concerns
on unfunded actuarial liabilities at ECL and BCCL exist, but have a marginal ~2% impact on our fair value.