Coal India: India proxy, with a miner's cash flow and a utility's stability: JPMorgan

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• Miner, utility, India proxy- Initiate with N, March-12 PT of Rs345, further
re-rating contingent on execution: In our view, while CIL is a structural play
on India's rising coal deficit and is an India proxy, we believe most of this has
been priced in to listing day gains (up 40% on Nov 4th). From here we believe
further re-rating is contingent on execution of volume growth and washed coal
plans. Our PT is based on 7.5x FY13E EV/EBITDA with our estimates being 8-
12% ahead of consensus.


• Fundamentals justify premium valuations, technicals could take premium
higher: Given that 77% of sales are priced at a 50-60% discount to imported
coal prices, we believe CIL's earnings are less exposed to coal price volatility.
Large coal reserves (18.9bnt per JORC), low CoP (open cast, thick seams, taxes
and freight costs borne by customers), a cash-rich balance sheet (net cash $8bn
with FCF of $8.3bn FY11-13E), OBR accounting and scarcity premium (only
listed Indian coal play) in our view justify the premium valuations to global
peers (38% on FY13E EV/EBITDA). We believe CIL is likely to trade between
a miner and utility's valuations. Technical factors like QE2 (bullish for
commodities and underlying equities), likely inclusion in major indices and
inclusion in the Futures only after 6 months could further increase valuation
premiums in the near term.

• Medium term, lower employee base is positive: CIL's employee base has
fallen to 397K from 439K in FY07. We expect annual reduction of 10-11K
employees due to retirement, resulting in savings in wage costs (which make up
46% of operating costs), potentially offset by 5-year wage escalations.

• What can go wrong-lack of volumes in the near term, regulatory issues in
the longer term, similar to oil and refining sector: With FY11E
production/offtake likely to be below target (JPMe 2%/5% against company
target of 7%), we believe the key risk over the next 2-3 years is CIL's ability to
achieve 5-7% volume growth, which also depends on ramp up of the railway
evacuation infrastructure. Medium to longer term, the key risk is any
government pressure regarding pricing/profitability. While CIL has the highest
profitability in the value chain (CIL-NTPC-SEB), 3 events over the next 2-3
years could test this: a) possible wage cost hike in FY12/13E; b) potential
mining tax and whether CIL would be allowed to pass on ensuing cost increases;
and c) increasing coal deficit for the IPPs and whether CIL is asked to reduce eauction
sales in order to supply more coal to IPPs.