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Coal India Limited -Unique coal utility in a deficitmarket
Where we are
Coal India (CIL), the largest coal producer globally (80% of India’s output), is well
positioned to gain from stronger coal demand in India led by increase in power
capacity as it sells 80% of output to power utilities. Output is growing at 6% CAGR
(FY07-10). Volume growth was muted in 1HFY11, due to extended monsoons, but
should improve in 2H, but logistics bottlenecks may constraint deliveries. Pricing at
discount to imports offers flexibility to hike prices led by costs. Assets are low cost,
but high wage cost base (45% of costs) offers scope for cost cuts.
Where we are going
We expect steady volume growth, mix gains & productivity gains to drive 15%
EPS CAGR over FY10-13E. We believe volumes should grow at 5.5% CAGR
over FY10-13E led by expected1.8x jump in power capacity (FY10-15E). Base
prices will likely be cost led, but it should gain from its planned 4x beneficiation
expansion as washed coal pricing is closer to the market (2x base price). Also,
sale of higher grade coal at market-linked prices pose further upsides.
Investment conclusion for 2011
We maintain our Neutral rating on the stock. CIL is a unique coal utility, offering
leverage to widening domestic coal deficit over the next few years. But post strong
33% rally since IPO, valuations are at a premium to coal peers and at a slight
discount to its closest utility peer, NTPC, limiting upside potential. Near term, there
is risk of volumes miss due to logistics constraints. We look for better entry points.
Stronger volumes and clarity around proposed mining tax are key triggers.
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