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Coal India Ltd. (COAL.BO)
Neutral Equity Research
Price hike key to firing the coal engine, fairly valued; initiate Neutral
Investment view
We initiate coverage on Coal India with a Neutral rating and 12-month
FY12E Director’s Cut-based target price of Rs405. In our view, CIL, which has
a near monopoly in India (80% of India supply), is best positioned to benefit
from burgeoning power sector coal demand and the widening coal deficit
(14% of demand in FY11E to 37% by FY15E). We like CIL for its top quartile
cash returns and strong growth (20% FY11-13E), driven by improved
realizations, operating leverage and low cash costs; but we believe upside
from the current levels will depend on CIL’s ability to hike notified prices,
which seems unlikely in the near term given inflationary concerns.
Core drivers of growth
1. With CIL’s coal price at a 70% discount to global prices, there is sufficient
headroom to increase prices in a coal deficit market (with no down
side risks) through differential pricing and improved product mix in favor of
E-Auction (12% of FY10 volumes) and washed coal (4%), which are sold at
70-100% premium to notified prices. 2. We expect CIL to sustain its first
quartile cash costs due to economies of scale and higher productivity.
Risks to the investment case
Inadequate transportation/logistics infrastructure and regulatory/land
acquisition delays are the key risks to our volume growth assumptions.
Valuation
CIL warrants a premium to global peers in our view, given its first quartile
cash returns, improving return profile, stable cash flows (low leverage to
global prices), strong balance sheet, and near-monopoly in a tight India
coal market. Post the recent rally (+20% ytd), the stock at 8.7x FY12E
EV/EBITDA trades at 15% prem. to global peers, offering limited upside.
Industry context
CIL is the only domestic play on India’s rising coal deficit.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India Ltd. (COAL.BO)
Neutral Equity Research
Price hike key to firing the coal engine, fairly valued; initiate Neutral
Investment view
We initiate coverage on Coal India with a Neutral rating and 12-month
FY12E Director’s Cut-based target price of Rs405. In our view, CIL, which has
a near monopoly in India (80% of India supply), is best positioned to benefit
from burgeoning power sector coal demand and the widening coal deficit
(14% of demand in FY11E to 37% by FY15E). We like CIL for its top quartile
cash returns and strong growth (20% FY11-13E), driven by improved
realizations, operating leverage and low cash costs; but we believe upside
from the current levels will depend on CIL’s ability to hike notified prices,
which seems unlikely in the near term given inflationary concerns.
Core drivers of growth
1. With CIL’s coal price at a 70% discount to global prices, there is sufficient
side risks) through differential pricing and improved product mix in favor of
E-Auction (12% of FY10 volumes) and washed coal (4%), which are sold at
70-100% premium to notified prices. 2. We expect CIL to sustain its first
quartile cash costs due to economies of scale and higher productivity.
Risks to the investment case
Inadequate transportation/logistics infrastructure and regulatory/land
acquisition delays are the key risks to our volume growth assumptions.
Valuation
CIL warrants a premium to global peers in our view, given its first quartile
cash returns, improving return profile, stable cash flows (low leverage to
global prices), strong balance sheet, and near-monopoly in a tight India
coal market. Post the recent rally (+20% ytd), the stock at 8.7x FY12E
EV/EBITDA trades at 15% prem. to global peers, offering limited upside.
Industry context
CIL is the only domestic play on India’s rising coal deficit.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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