Coal India- Medium-Term Thesis Played Out; Downgrade to EW :: Morgan Stanley Research

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Coal India Limited
Medium-Term Thesis Played
Out; Downgrade to EW
What's Changed
Rating  Overweight to Equal-weight
Price Target  Rs425.00 to Rs442.00
EPS for F12E and F13E  By -0.5% and 0.4%
CIL’s 35% outperformance vs. the Sensex YTD
suggests limited upside to us. Our medium-term
thesis – improvement in sales mix, coal prices, and
news flow on volume growth – has played out.
Likely delay in notified price hikes until March 2012
may result in a pause in the stock’s advance.
Slight estimate changes; price target up 4% to
Rs442: Our new target implies EV/EBITDA of 7.2x on
our revised F13 estimate, a 28% premium to the global
peer group average of 5.6x. We believe CIL merits a
premium but cannot justify more than 25-30%.
We see only one near-term catalyst left: That is
cessation of OBR adjustment by CIL. We estimate that
this change could lift consensus earnings by about 10%
for F13.
We still view Coal India as a structural long-term
growth stock: We think CIL’s price uptick remains a
potent long-term story; exposure looks more beneficial
on a six- to eight-quarter horizon.
Upside risks:
1) Continued investor perception that CIL stands out
as a low-risk stock amid risks of macroeconomic
slowdown.
2) Indian Railways (IR) is able to provide rail wagons at
more than 180-185 rakes/day in the next 3-6
months vs. the F11 average of 162.
3) CIL increases prices in 2QF12 – we have pushed
out our expectation from September 2011 to March
2012. Again, this is a key reason for our downgrade.