Hold Coal India; target of Rs 360: R K Global

“Coal India (CIL) remains on the pinnacle of strength, showing large-scale demonstration of the economic, technical and financial performance that compiles the major components of a mammoth integrated powerhouse.”

“CIL has changed its price regime from Ultra Heat Value (UHV) to Gross Calorific Value (GCV) which is expected to increase the revenue of the company since the price shift will give advantage of 10-12% coal price hike. The companies will now instead of selling seven grades (A to G) of coal will now sell almost 17 grades of coal varying from 2,200 kcal to 7,000 kcal. Hence, we increased average prices of coal by 6% to Rs1708 per ton. With that, we revised our revenue to Rs737565mn for FY12E compared to our previous estimate of Rs620679mn and expect it to grow at CAGR of 6.2% during FY12-14E.”

“The company has approved to increase the wages by 25% under five year agreement with the workers; however the company has already provision for the wage hike cost and hence could not expect it to impact the profitability of the company immensely. With 25% wage hike, the company total wage cost is likely to increase by Rs4000crs for the year. Although we have increased our employment cost by 25% (previously 23%) to Rs194764mn but still we expect that the company’s growth in revenue will offset the employment cost. We revised our EBITDA growth to Rs155665mn in FY12E compared to our previous estimate of Rs148875mn and expect it to grow at CAGR of 9% during 2012-14E. Coal India has planned to invest around Rs30,000 crs during 12th Five-Year Plan (FY13-FY17) in its own business apart from acquisitions. This means it will invest Rs6,000 crore annually on an average while in the last five years. Coal India top the cash rich list among the PSU with cash of around Rs53600crs as on Sep’11. We increased our capex growth to 19.7% from 11.6% to Rs629717mn in FY14E from Rs367211mn in FY11.”

“At CMP of Rs341, the stock is trading at EV/EBITDA of 12x on FY13E EBITDA of Rs186256mn. We have revised our valuation by incorporating 25% wage hike (23% previously estimated), capex plan of Rs30000crs . We valued CIL based on DCF, assuming risk free rate of 8%, beta of 0.56. We have used FY12-14 as explicit period for our forecast. Assuming cost of equity at 12.5% and terminal growth rate of 5% on the future cash flows, we arrive at an our revised price of Rs360/share which is ~2.4% lower than our earlier target of Rs369/share. At our target price, the stock offer upside potential of ~5.6%; we recommend to “Hold” the stock at this level,” says R K Global research report. 

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