Buy
Coal India Ltd. (COAL.BO)
Return Potential: 27% Equity Research
Risk-reward compelling; upgrade to Buy
Source of opportunity
We upgrade Coal India (CIL) to Buy (from Neutral) with a 12-m price target
of Rs375 (unchanged) now implying 27% upside following the recent
correction. We fine tune FY14E/15E EPS by +2%/+1% and are 2%-8% above
consensus (we introduce FY16E EPS). We believe CIL is one of the few
stocks in Asia which: 1) is largely unaffected by falling global coal prices (in
fact it can raise prices as it sells regulated (FSA) coal at avg. 50% discount);
2) has top quartile and rising CROCI; 3) enjoys sustainable cost leadership;
4) offers attractive valuations and dividend yields (6.5% on FY15E DPS). We
believe risk-reward is compelling and key concerns are already priced in.
Catalyst
1) We expect CIL’s earnings to grow at 12% CAGR from FY13-FY16E and
EBITDA margins (ex-OBR)/CROCI to expand from 31%/49% to 36%/56%. Our
regional analysts expect earnings for Indonesia and China coal stocks to
decline. 2) Conclusion of a FPO (media reports of further government
divestment) would remove a key overhang. 3) Rising dividend yield
(4%/6.5% on Mar 2013/15E) makes the stock attractive vs. peers. 4)
Attractive valuations – CIL is trading at historical lows.
Valuation
Our target price is based on Director’s Cut. On our target price, CIL implies
(on ex-OBR basis) 11.1x / 9.7x P/E and 6.8/5.6x EV/EBITDA FY14/FY15. CIL is
trading at 2SD below median on PE and EV/EBITDA at 8.6x/7.5x PE and
4.7x/3.7x (FY14/FY15). Our base assumes: 1) 5% increase in FSA prices; 2)
6% CAGR volume growth; and 3) no e-auction price increase. Even in a bear
case scenario where we assume: 1) no volume growth; 2) no FSA price rise;
and 3) 5% CAGR decline in e-auction ASP, CIL’s implied value of Rs295 is
largely in line with the current market price.
Key risks
Delay in FPO, muted production/sales growth, inability to raise prices.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
��
Coal India Ltd. (COAL.BO)
Return Potential: 27% Equity Research
Risk-reward compelling; upgrade to Buy
Source of opportunity
We upgrade Coal India (CIL) to Buy (from Neutral) with a 12-m price target
of Rs375 (unchanged) now implying 27% upside following the recent
correction. We fine tune FY14E/15E EPS by +2%/+1% and are 2%-8% above
consensus (we introduce FY16E EPS). We believe CIL is one of the few
stocks in Asia which: 1) is largely unaffected by falling global coal prices (in
fact it can raise prices as it sells regulated (FSA) coal at avg. 50% discount);
2) has top quartile and rising CROCI; 3) enjoys sustainable cost leadership;
4) offers attractive valuations and dividend yields (6.5% on FY15E DPS). We
believe risk-reward is compelling and key concerns are already priced in.
Catalyst
1) We expect CIL’s earnings to grow at 12% CAGR from FY13-FY16E and
EBITDA margins (ex-OBR)/CROCI to expand from 31%/49% to 36%/56%. Our
regional analysts expect earnings for Indonesia and China coal stocks to
decline. 2) Conclusion of a FPO (media reports of further government
divestment) would remove a key overhang. 3) Rising dividend yield
(4%/6.5% on Mar 2013/15E) makes the stock attractive vs. peers. 4)
Attractive valuations – CIL is trading at historical lows.
Valuation
Our target price is based on Director’s Cut. On our target price, CIL implies
(on ex-OBR basis) 11.1x / 9.7x P/E and 6.8/5.6x EV/EBITDA FY14/FY15. CIL is
trading at 2SD below median on PE and EV/EBITDA at 8.6x/7.5x PE and
4.7x/3.7x (FY14/FY15). Our base assumes: 1) 5% increase in FSA prices; 2)
6% CAGR volume growth; and 3) no e-auction price increase. Even in a bear
case scenario where we assume: 1) no volume growth; 2) no FSA price rise;
and 3) 5% CAGR decline in e-auction ASP, CIL’s implied value of Rs295 is
largely in line with the current market price.
Key risks
Delay in FPO, muted production/sales growth, inability to raise prices.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
No comments:
Post a Comment