Coal India – Value for money - Sushil Finance

Recommendation – Buy

Value for money

Coal India (CIL) is the world's largest coal company both in terms of production (431mt in FY10 - 82% of India's total production) and reserves. CIL operates 471 mines in 21 major coalfields (five coal fields accounted for ~65% production over the last three years) across 8 states in India. It enjoys higher margin as compared to its global peers due to low cost of production which gives the further room to the company to increase its domestic price. We believe that company is well positioned to capitalize on significant demand – supply gap in India and hence we recommend "Buy" to the issue.

Huge Reserves: CIL operates 471 mines in 21 major coalfields (five coal fields accounted for ~65% production over the last three years) across 8 states in India with the total resources & reserves as per ISP guidelines is around 64.8bn tones. In addition to the coal mine in India it has undertaken various steps for the acquisition of coal assets outside India and has acquired prospecting license for two coal blocks in Mozambique.

Demand Supply mismatch to increase: India has got the 3rd largest reserves of coal in the world, which is roughly about 287 bt. But coal production has grown at a slow rate of 5% in the last ten years, whereas demand has grown at about 6% in recent times and is expected to grow to 9% going forward, as new power, steel and cement projects come up. In 2008, domestic production accounted for 90% of total consumption while rest was imported and in 2009, shortfall increased to 11% due to increase in demand. We believe that any increase in the CIL production would help the company to garner the incremental demand.

Earnings can only increase, steady business to command premium valuation: We believe that company has got huge potential to increase earnings as currently coal prices In India are regulated to an extent which keeps domestic prices about 50-60% lower than international prices. Even if it is partially linked to international prices through some index then its earnings can jump multifold. As such we believe that this company will continue to generate huge cash with steady business which makes it more of a utility business rather than commodity one. On upper band company trades at 11.4x & 9.2x FY11E & FY12E earnings, on EV/EBITDA it trades at 6.9x & 4.6x FY11E & FY12E EBITDA. We believe that stock should command premium valuation as compared to its global peers which trade in range of 5 – 7x one year forward EV/EBITDA largely on back of higher margin, healthy return ratios and steady business.

Source : Equity Bulls

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