Accumulate Coal India; target Rs 368: Sushil Finance
Sushil Finance is bullish on Coal India and has recommended accumulate rating on the stock with a target price of Rs 368 in its April 30, 2013 research report.
April 30, 2013 / 11:01 IST
Sushil Finance is bullish on Coal India and has recommended accumulate rating on the stock with a target price of Rs 368 in its April 30, 2013 research report.
"Coal India is one of the largest coal mining companies in world (in terms of reserves and production) accounting for ~80 percent of coal production in India. Continuously rising coal demand coupled with virtual monopolistic position in industry is likely to drive CIL’s volume growth going ahead. We expect production & offtake to grow at a CAGR of ~4.5 percent & 5.0 percent respectively over FY12-15E (management guidance of ~8 percent) which in our view seems attainable considering the increasing government initiatives to revive power segment. Also, considering recent hike in diesel prices along with higher wages & inflation, we believe coal price hike is imminent & expect it to increase by ~3-4 percent over the next few quarters, thus giving further impetus to earnings. Moreover, with better operating leverage & retiring legacy employees, we expect further improvement in margins (~150 bps) going ahead.Despite strong earnings growth over FY10-13E (CAGR ~18 percent), higher cash reserves (~Rs.700 bn v/s Rs.390 bn) coupled with better clarity on dividend policy, the stock has been trading close to its listing price, thus not valuing the incremental growth over the same period. Moreover, gradual emerging clarity on FSA norms, coal-price pooling mechanism, likely expedition in clearances etc. further provides better macro environment compared to past. Thus we believe that, post-correction, the price seems to have factored in majority of the concerns & hence the downside looks limited from the current levels.CIL has a healthy balance sheet with ‘net-debt free’ status and cash reserves to the tune of ~Rs.700 bn (Rs.110/share) as on FY13E. Strong business model along with lower capex requirement enables the Company to generate huge free cash-flows (~Rs. 190-200 bn) which is likely to improve going ahead, thus further strengthening its balance-sheet. The Company also has high payout ratio (~40 percent) considering lower retention requirement resulting in high dividend yield of ~3.1 percent. Moreover, it has a strong return ratios with ROE & ROCE pegged at 36 percent & 32 percent respectively. Healthy balance-sheet, strong operating cash-flows coupled with robust return ratios not only provides better financial stability but also supports ongoing expansion plans of the Company.Outlook & Valuation: CIL with its huge coal reserves, strong monopolistic position, low cost of production and a comparatively lower realization (discount to global prices) is well placed to capitalize on huge opportunity in coal industry. Increasing government initiatives to meet growing coal demand could result in higher than expected volumes, thus providing upside risk to our assumptions. At CMP of Rs.313, the stock is trading at an attractive valuations of 11.2x & 10.3x its FY14E & FY15E EPS of Rs.28.0 & Rs.30.4 respectively. Hence, considering the sound business model, huge growth potential coupled with strong financials, we have a positive outlook on the stock & recommend accumulate with a DCF based price target of Rs 368," says Sushil Finance research report.FIIs holding more than 30% in Indian cosDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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