The company’s strong business position, healthy prospects and reasonable valuation make the IPO attractive
It pays huge dividends to be a leader in a growing industry wherein the demand continues to outpace the supply. Coal India supplies 82 per cent of the coal required in the country and is considered to be the world’s largest coal-mining company in terms of production and reserves. Considering the company’s overall position, future prospects and valuations, investors can subscribe to Coal India’s IPO.
Seller’s market
Coal India is a virutal monopoly in the domestic market with over 80 per cent share. More importantly, it is the lowest cost producer of coal in the world (about $12 per tonne). However, since the demand for coal in India outstrips supply by a good margin, many of its customers also have to depend on international markets or the spot market where they have to shell out substantially higher prices. Since Coal India sells its produce at far lower rates (compared to the market price) and the supplies are reliable, the company remains the customers’ first preference. In this context, Coal India relatively has no competition and is in a better position to take advantage of the coal deficit in the country, which will only widen in the coming years.
| ISSUE DETAILS | |
| Price (Rs) * | 225-245 |
| Size (Rs cr) | 14,220-15,459 |
| Opens on | 18-Oct |
| Closes on | 21-Oct |
| Crisil grading | 5/5 |
| * Retail investors to get a 5% discount | |
Strong visibility
According to IIFL Research, the coal shortfall in the country is set to widen from 65 million tonne (MT) in 2009-10 to 155 MT by 2012-13 and further to 277 MT by 2016-17. This is attributed to India’s growing demand for coal. Estimates suggest that about 1,08,000 Mw of coal-fired new power generation capacities will be added by the end of 2017, which will require huge amounts of coal. Also, the coal demand from steel, cement and other industries is set to grow, which taken together would lead to an over 10 per cent growth in the demand over the next five years. Against this, the growth in domestic supply is pegged at only 6-7 per cent.
| HEALTHY SHOW | |||||
| FY09 | FY10 | FY11E | FY12E | FY13E | |
| Offtake (mln ton) | 400.8 | 415.2 | 460.4 | 477.1 | 502.4 |
| Blended Price (Rs/ ton) | 962 | 1,070 | 1,101 | 1,158 | 1,215 |
| Revenues (Rs cr) | 41,094 | 47,723 | 53,234 | 58,515 | 64,544 |
| Ebitda (%) | 16.1 | 27.4 | 29 | 27.7 | 29.1 |
| Ebitda/tonne (Rs) | 165 | 315 | 335 | 340 | 374 |
| Net profit (Rs cr) | 4,063 | 9,829 | 11,222 | 11,775 | 13,971 |
| EPS (Rs) | 6.4 | 15.6 | 17.8 | 18.6 | 22.1 |
| ROE (%) | 22.4 | 43.8 | 37.5 | 30.9 | 29.6 |
| E: Estimates; All figures are consolidated Source: IIFL Research | |||||
Compounding factor
Considering its position in the industry and large coal reserves, which could last for over 100 years, Coal India is best placed to harness the emerging opportunities.
First, with the commissioning of 25 ongoing projects, the company is targeting 6 per cent annual growth in production to 487 MT by 2011-12 as compared to 431 MT in 2009-10.
Second, a majority of its coal is sold at notified prices, which are significantly lower (almost 60 per cent) compared with the international benchmark prices. This not only provides the company revenue stability (in the event of a fall in the international coal prices), but also gives it the leeway to consistently increase its prices (though marginally, by about 5-6 per cent) every year. Notably, the company has also started to sell part of its coal production (about 11.4 per cent in 2010-11) through the e-auction route, which yields higher prices. It intends to increase the share of e-auction sales going ahead.
Third, it is also simultaneously upgrading its technological capability, phasing out high-cost mines and reducing employee cost, all of which will add to the margins. Simultaneously, the company also plans to develop 20 coal beneficiation facilities (high-grade coal) which will have a feedstock capacity of 111.1 MT compared with the current capacity of 39.4 MT. This should further boost its realisations as high-grade coal commands higher prices in the market.
The combination of consistent growth in volumes, increase in coal prices and improvement in operational efficiencies should lead to higher margins and an average earnings growth of about 12-15 per cent over the next three-four years.
Outlook and valuations
Considering its track record, healthy prospects and enviable financials, including high operating margins (27 per cent), return on equity (44 per cent), large free cash flow and virtually zero debt status, Coal India is among the well managed companies in the country. In fact , owing to the very marginal capex requirement, it has accumulated cash and has a bank balance of Rs 39,000 crore (this however includes provisions pertaining to wage revisions, regulatory norms, etc) in the books, which it plans to use for buying coal assets in the international markets. The strong cash flow will also enable it to consistently pay healthy dividends.
Meanwhile, analysts value the company near Rs 300-345 per share. At the upper end of the price band of Rs 245, the issue is priced at 14 times its 2010-11 estimated earnings and 13 times the 2011-12 earnings, which is reasonable considering the company’s overall position in its business. The latter is also reconfirmed from the highest grading of five given by Crisil.
