Buy Coal India: Top PICKS post Correction- ENAM: India Strategy

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Resources: Buy Coal India
􀂙 CIL is undergoing a metamorphosis from a mere production driven company to a production plus profitability
focused mining behemoth. It is setting up 111 mn t of new washing capacity for its existing production and ~90% of
incremental production will have dedicated washeries. The proportion of washed coal is expected to rise to 45% of
total production by FY17 as against only 4% in FY10
􀂙 Margin expansion driven by washed coal volumes: Since washed coal realization is ~2.3x that of raw coal, we expect
huge EBITDA margin expansion (45% in FY17 vs 27% in FY10) going forward. Led by better realizations and a
volume CAGR of 6%, we expect EBITDA and PAT to grow at a CAGR of 23% and 22% respectively by FY17
􀂙 Sustainability of washed coal pricing: We believe that washed coal pricing can be absorbed by the regulated power
industry given improved load factor and reduced specific coal consumption, without substantial inflationary pressure
(to lead to ~10% increase in avg. power price). CIL’s washed coal price is equal to the marginal cost of Indonesian
suppliers (USD 45/t) and cheaper by ~30% assuming USD 65/t FOB price for 5,000 Kcal coal

􀂙 CIL has a strong balance sheet with FY10 net cash of USD 8.2 bn and conservative accounting practices.
Overburden reserves of USD 2.7 bn, can increase book value by USD 1.8 bn (post tax) under the proposed IFRS
regime
􀂙 We have a BUY rating on the stock with a 1-year DCF based target price of Rs 385, implying an upside of 20% from
CMP. In the long term, CIL has potential to deliver 23% CAGR return over next 5 years in-line with earnings growth