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More coal is the goal as FSA clarity
emerges…
We expect Coal India Ltd (CIL) to turn the tide of flat production
growth during past three years and achieve higher coal production
and sales with a CAGR of 5% and 5.6% respectively during FY12-
15E. We believe that the market at present is not willing to factor in
CIL’s ability to increase production as well as prices and seems to
have remained overly concerned over issues related to FSA signing
and reduction in e-auction coal volumes. We expect this perception
to change going forward and expect net sales and EBITDA CAGR of
8.8% and 13.6% during FY12-15E. Valuations appear attractive to
us with a huge cash balance (~25% of market cap). We initiate BUY
with a target price of Rs395.
Production at an inflection point, we expect smart up move
from here: After flat production growth during FY10-12, we
believe the production is at an inflection point and expect
production CAGR of 4.6% during FY12-17E. We expect higher
production on the back of i) increased capacity utilization at
several coalfields and faster approvals for new projects as well as
capacity expansions at existing mines. We see FY13E/14E coal
production of 458/481 MT respectively.
FSA signing - a blessing in disguise and would lead to higher
dispatches: We see the forced FSA signing (as enforced through
Presidential directive) as a blessing in disguise for CIL. We believe
that market perception and concerns on FSAs have been
overdone for long. In our view FSA signing would give the
necessary push to CIL to produce and sell more. Also, with the
penalty clause becoming practically non-existent after CIL’s
board meeting on April 16, 2012, we see the present FSA
situation as a win-win for CIL. We expect CIL sales volume to
reach ~546 MT by FY17E (CAGR of 4.7%). We see ~7% sales
growth in FY13E to 463 MT supported by better railway logistics.
We expect e-auction sales to remain constant at ~48.5 MT over
the next three years.
Shift to GCV based pricing positive, price increase matters
the most now: We see the shift to GCV based pricing as a
positive and expect 4% price increase each in FY13E & FY14E
from Coal India on the new GCV based price list.
Low cost open cast operations remain key strength: Low cost
and open cast (90% of overall mining) operations continue to
remain the key strength and earnings driver for the company.
Wages have been hiked by ~25% and we expect stable employee
cost/tonne from FY13E onwards as the number of employees
drop and production increases.
Valuations – attractive, initiate with a Buy: We see CIL stock
trading at attractive valuations with FY14E adj. EV/EBITDA of 5.6x and
FY14E adj. P/E of 10.4x. With increasing comfort on higher volumes
going forward and expected price increase, we value the stock at 7x
FY14E adj. EV/EBITDA (~15% premium to global peers) to arrive at a
fair value of Rs395 for the stock. Our DCF valuation fair value stands
at Rs363. We initiate buy with a target price of Rs395.
Key Risks: Flat to negative production growth, lower sales volumes
due to logistics constraints, lower e-auction volumes for meeting FSA
quantities and price increase not allowed by the government.
