Summary
Coal India ltd. (CIL) is the largest coal producing company in the world based on their raw coal
production, it supplies to 80% of India’s power production.
CIL to benefit from huge incremental potential for electricity generation from Coal
Coal supports around 52% of the primary energy consumption and over 80% of electricity
generation in India. Given the reserves of over 60 bn MT of coal, it can support 409 GW of
incremental power generation. Planned incremental capacity is expected to reach 196 GW from
current levels of 99GW by the end of XIIth five year plan. This would benefit coal India limited
over long term as it supplies to 80% of India’s power production.
Indian Power plants designed to use imported coal only to around 50% reduces the risk of
imports for CIL.
Given the huge demand supply gap of around 90 mn MT in FY11, which is expected to reach 170
to 200mn MT by end of FY12e as per the draft paper by planning commission poses a big
advantage to CIL primarily because of following two reasons.
• Firstly Indian power plants are not designed to take more than 50 % of imported coal
presently.
• Secondly imported coal meant for power plants being dearer by almost over 60% in
comparison to domestic coal, makes it costlier to resort to imported coal.
Accordingly the off take risk for CIL’s product remains negligible unlike players present in other
commodities such as steel and cement, who face huge off take risk.
Rise in e-auction price to aid CIL in long term
With 25% of CIL sales being done at close to international prices, together with sales of ~11% of
total sales through e-auction route and demand supply gap, we believe the prices of coal to
remain firm over next one year impacting CIL’s profitability positively over coming quarters.
The price increase for the linkage coal are not explicitly set out, however it aligns with inflation
and wage increase, we expect another price increase of around 10% during this year. Company
sells around 11% of total sales, through e-Auction with a premium to domestic linkage coal,
which has risen from 60% in FY10 to 80% levels during FY11.Currently the premiums are running
at 90%, with international coal prices expected to rise we see the premium to remain firms and
would benefit the CIL.
Valuation
The stock has corrected more than 14.5% in last one month against a correction of 1.6% in
sensex. While concerns over New Mining Bill for setting aside 26% of profit sharing to the
regional development around the mines, would impact the earnings of CIL in FY13E. Company’s
volume has grown at a CAGR of 5.6% over past 4 years. We believe the new mining bill once
implemented would help the company in getting approvals; mainly forest clearances. We are
positive on the CIL’s long term growth story, we have valued CIL on EV/EBIDTA basis at a target
price of Rs.395 per share with a target multiple of 8.5x on FY13E EBIDTA of Rs. 293bn.
Coal India ltd. (CIL) is the largest coal producing company in the world based on their raw coal
production, it supplies to 80% of India’s power production.
CIL to benefit from huge incremental potential for electricity generation from Coal
Coal supports around 52% of the primary energy consumption and over 80% of electricity
generation in India. Given the reserves of over 60 bn MT of coal, it can support 409 GW of
incremental power generation. Planned incremental capacity is expected to reach 196 GW from
current levels of 99GW by the end of XIIth five year plan. This would benefit coal India limited
over long term as it supplies to 80% of India’s power production.
Indian Power plants designed to use imported coal only to around 50% reduces the risk of
imports for CIL.
Given the huge demand supply gap of around 90 mn MT in FY11, which is expected to reach 170
to 200mn MT by end of FY12e as per the draft paper by planning commission poses a big
advantage to CIL primarily because of following two reasons.
• Firstly Indian power plants are not designed to take more than 50 % of imported coal
presently.
• Secondly imported coal meant for power plants being dearer by almost over 60% in
comparison to domestic coal, makes it costlier to resort to imported coal.
Accordingly the off take risk for CIL’s product remains negligible unlike players present in other
commodities such as steel and cement, who face huge off take risk.
Rise in e-auction price to aid CIL in long term
With 25% of CIL sales being done at close to international prices, together with sales of ~11% of
total sales through e-auction route and demand supply gap, we believe the prices of coal to
remain firm over next one year impacting CIL’s profitability positively over coming quarters.
The price increase for the linkage coal are not explicitly set out, however it aligns with inflation
and wage increase, we expect another price increase of around 10% during this year. Company
sells around 11% of total sales, through e-Auction with a premium to domestic linkage coal,
which has risen from 60% in FY10 to 80% levels during FY11.Currently the premiums are running
at 90%, with international coal prices expected to rise we see the premium to remain firms and
would benefit the CIL.
Valuation
The stock has corrected more than 14.5% in last one month against a correction of 1.6% in
sensex. While concerns over New Mining Bill for setting aside 26% of profit sharing to the
regional development around the mines, would impact the earnings of CIL in FY13E. Company’s
volume has grown at a CAGR of 5.6% over past 4 years. We believe the new mining bill once
implemented would help the company in getting approvals; mainly forest clearances. We are
positive on the CIL’s long term growth story, we have valued CIL on EV/EBIDTA basis at a target
price of Rs.395 per share with a target multiple of 8.5x on FY13E EBIDTA of Rs. 293bn.
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