Coal India (COAL.BO)
Buy: Value in the Coal Colossus
Buy — Post a 16% YTD correction, we see CIL as offering enhanced value. While the
commodities environment remains volatile, we like CIL given: 1) inexpensive valuations
– 9.2x Sep14E PE (Indonesian peers at 7-11x; CIL’s trading avg since Dec10 is 11.5x);
2) a cash-rich balance sheet (~35% of mkt cap; dividend yield ~5%); 3) earnings
upside (we forecast FY14 despatch growth at 3.4% vs CIL’s 6% target and lower yoy eauction
volumes/price); and 4) potential hikes in coal prices.
Price hikes: by no means impossible — Though the timing/quantum of price hikes is
hard to predict, trends so far indicate CIL’s desire for margin protection. The board
approved a price rationalization wef 28th May13, namely: 1) +10% for low grade coal;
2) -12% for high grade coal; 3) special hikes for higher cost mines. Overall, according
to CIL, the price hike is likely to be ~4.8% (excl e-auction). Note: we forecast a blended
rise of 2% pa in FY14 and FY15 (potential upside).
6% despatch growth target — CIL’s FY13 despatches grew at 7% vs. a 4% CAGR
through FY07-12. We believe if CIL attains its 6% despatch growth target for FY14
(492mt), it would provide comfort on the earnings trajectory. However, for now, we
conservatively assume 3.4% yoy growth in despatches to 481mt (488mt earlier) and a
rake requirement of ~198/day – leaving room for upside.
TP incorporates Draft Mining Bill — Our TP of Rs360 (vs prior Rs365) is based on
two scenarios (50:50 weighting): #1 assumes no profit sharing – derived value of
Rs374; #2 assumes 26% profit sharing from FY15, for a value of Rs347. At our TP, CIL
would trade at 11.2x Sep14PE (excl OBR adj). We see upside to our TP if the draft bill
is amended so CIL has to share an amount equal to royalty with the locals (vs 26% of
profits), as CIL would likely pass the burden to end consumers.
Sensitivity — PAT would rise ~3% if average realizations rise 1%. A 1% change in
despatches would impact PAT by ~1.5%.
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Buy: Value in the Coal Colossus
Buy — Post a 16% YTD correction, we see CIL as offering enhanced value. While the
commodities environment remains volatile, we like CIL given: 1) inexpensive valuations
– 9.2x Sep14E PE (Indonesian peers at 7-11x; CIL’s trading avg since Dec10 is 11.5x);
2) a cash-rich balance sheet (~35% of mkt cap; dividend yield ~5%); 3) earnings
upside (we forecast FY14 despatch growth at 3.4% vs CIL’s 6% target and lower yoy eauction
volumes/price); and 4) potential hikes in coal prices.
Price hikes: by no means impossible — Though the timing/quantum of price hikes is
hard to predict, trends so far indicate CIL’s desire for margin protection. The board
approved a price rationalization wef 28th May13, namely: 1) +10% for low grade coal;
2) -12% for high grade coal; 3) special hikes for higher cost mines. Overall, according
to CIL, the price hike is likely to be ~4.8% (excl e-auction). Note: we forecast a blended
rise of 2% pa in FY14 and FY15 (potential upside).
6% despatch growth target — CIL’s FY13 despatches grew at 7% vs. a 4% CAGR
through FY07-12. We believe if CIL attains its 6% despatch growth target for FY14
(492mt), it would provide comfort on the earnings trajectory. However, for now, we
conservatively assume 3.4% yoy growth in despatches to 481mt (488mt earlier) and a
rake requirement of ~198/day – leaving room for upside.
TP incorporates Draft Mining Bill — Our TP of Rs360 (vs prior Rs365) is based on
two scenarios (50:50 weighting): #1 assumes no profit sharing – derived value of
Rs374; #2 assumes 26% profit sharing from FY15, for a value of Rs347. At our TP, CIL
would trade at 11.2x Sep14PE (excl OBR adj). We see upside to our TP if the draft bill
is amended so CIL has to share an amount equal to royalty with the locals (vs 26% of
profits), as CIL would likely pass the burden to end consumers.
Sensitivity — PAT would rise ~3% if average realizations rise 1%. A 1% change in
despatches would impact PAT by ~1.5%.
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