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Coal India Ltd
Better way to play India’s booming energy demand
We consider Coal India (CIL) to be the best play on the rising coal deficit in the
country. Over the next three years, we expect CIL to register an 18% CAGR in
EPS driven by a substantial expansion in EBIT margins from 19% in FY10 to 29%
in FY13. Margin expansion will likely be led by improved realisations (5%),
labour efficiency (3%), a focus on beneficiated coal (1%) and technology
upgrades (1%). We value CIL at 10x FY13E EV/EBITDA, given its unique position
in the country (with ~82% market share), led by a defensive business model and a
strong balance sheet. Further, given its utility-type earnings profile and lower
correlation with international coal prices, we believe it deserves a higher
valuation multiple than a commodity stock. We initiate coverage on the company
with a BUY rating and a price target of Rs 400.
Key upside risks to our estimates include cash deployment, better pricing parity
with imports, and a faster-than-expected turnaround in subsidiaries (ECL and
BCCL). Key downside risks are delays in land acquisition, inability to meet
minimum contracted quantity (MCQ), inability to pass on higher employee costs,
and transport infrastructure bottlenecks.
Net long coal a safer bet than utilities: We believe electricity units sold would
likely increase in line with overall growth in the economy, but power tariffs (and
ROEs) should normalise by FY15-FY16. In our view, the coal demand–supply gap
for the Indian power sector could widen from 69mmt in FY11 to 137mmt by FY13,
and deficit, as a percentage of demand, from 14% in FY11 to 21% in FY13.
Strong operational performance ahead: We expect CIL to deliver a robust
operational performance over FY11–FY13, with sales likely to grow at a 12%
CAGR (10.9% during FY06–FY10) and EBITDA margins expected to increase
sharply from 22% in FY10 to 32% in FY13. Margin expansion will be supported
by improved labour efficiency, subsidiary turnaround, focus on beneficiated coal
and upgrades to execution technology.
Robust balance sheet but risk of volatility in earnings persists: We expect the
company to report a net profit CAGR of 18% over FY11-FY13, with ROE settling in
the range of 30–40% (on account of non-utilisation of cash). CIL has cash of Rs
391bn on its books which could be used for future expansion plans and
international acquisitions, thereby further bolstering ROE. In addition, a net worth
of Rs 258bn would qualify the company for global project bids.
Initiate with BUY, PT of Rs 400/sh: We value CIL at 10x EV/EBITDA on FY13E
given its defensive business model. Global coal companies are trading in the
range of 5–10x EV/EBITDA and 9–14x P/E on CY12E. Triggers for a stock rerating
include any increase in raw coal price, international acquisitions, cash
deployment and faster subsidiary turnaround.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India Ltd
Better way to play India’s booming energy demand
We consider Coal India (CIL) to be the best play on the rising coal deficit in the
country. Over the next three years, we expect CIL to register an 18% CAGR in
EPS driven by a substantial expansion in EBIT margins from 19% in FY10 to 29%
in FY13. Margin expansion will likely be led by improved realisations (5%),
labour efficiency (3%), a focus on beneficiated coal (1%) and technology
upgrades (1%). We value CIL at 10x FY13E EV/EBITDA, given its unique position
in the country (with ~82% market share), led by a defensive business model and a
strong balance sheet. Further, given its utility-type earnings profile and lower
correlation with international coal prices, we believe it deserves a higher
valuation multiple than a commodity stock. We initiate coverage on the company
with a BUY rating and a price target of Rs 400.
Key upside risks to our estimates include cash deployment, better pricing parity
with imports, and a faster-than-expected turnaround in subsidiaries (ECL and
BCCL). Key downside risks are delays in land acquisition, inability to meet
minimum contracted quantity (MCQ), inability to pass on higher employee costs,
and transport infrastructure bottlenecks.
likely increase in line with overall growth in the economy, but power tariffs (and
ROEs) should normalise by FY15-FY16. In our view, the coal demand–supply gap
for the Indian power sector could widen from 69mmt in FY11 to 137mmt by FY13,
and deficit, as a percentage of demand, from 14% in FY11 to 21% in FY13.
Strong operational performance ahead: We expect CIL to deliver a robust
operational performance over FY11–FY13, with sales likely to grow at a 12%
CAGR (10.9% during FY06–FY10) and EBITDA margins expected to increase
sharply from 22% in FY10 to 32% in FY13. Margin expansion will be supported
by improved labour efficiency, subsidiary turnaround, focus on beneficiated coal
and upgrades to execution technology.
Robust balance sheet but risk of volatility in earnings persists: We expect the
company to report a net profit CAGR of 18% over FY11-FY13, with ROE settling in
the range of 30–40% (on account of non-utilisation of cash). CIL has cash of Rs
391bn on its books which could be used for future expansion plans and
international acquisitions, thereby further bolstering ROE. In addition, a net worth
of Rs 258bn would qualify the company for global project bids.
Initiate with BUY, PT of Rs 400/sh: We value CIL at 10x EV/EBITDA on FY13E
given its defensive business model. Global coal companies are trading in the
range of 5–10x EV/EBITDA and 9–14x P/E on CY12E. Triggers for a stock rerating
include any increase in raw coal price, international acquisitions, cash
deployment and faster subsidiary turnaround.
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