Buy Coal India; target of Rs 433: Microsec

Microsec is bullish on Coal India (CIL) and has recommended buy rating on the stock with a target of Rs 433 in its August 23, 2012 research report.

“Coal India is the single largest coal producer in the world, sitting on huge reserves of 18,862.9MT, out of which 10,595.1MT are proved reserves and 8,267.8MT are probable reserves. With robust growth in dispatches and better rake availability, higher realizations from shift to GCV (Gross Calorific Value), price hikes, increased production and clarity on FSA clauses, improved blended realizations from setting up 20 new coal washeries with a combined capacity of 111.1MT during the 12th plan, we expect CIL to post better margins.”

“CIL has changed the pricing mechanism of non‐coking coal from UHV based grading system to GCV based from January, 2012. Under the new GCV grading, coal would be classified under 17 slabs (300kcal each) from 2,200‐7,000kcal and above 7,000kcal. The same has been positive for CIL & has led to improvement in realizations in past two quarters with a YoY increase of 19.2% in Q1FY12 & 7.6% in Q2FY12, while having a negative impact on two of its subsidiaries i.e. WCL (Western Coal Fields) & ECL (Eastern Coal Fields) (~11% revenue contribution respectively). CIL has taken a price increase for ~10‐15% in case of WCL and we expect similar kind of action in regard to pricing for other subsidiaries as well.”

“CIL will have to pay penalty of 1.5%, where supply is between 65%‐80%; 5% for supply between 60‐65%; 10‐20% for supply between 50%‐60%, and 40% if the supply is less than 50%. CIL will meet 80% requirement with 15% imported coal & 65% domestic coal. This would be an immaterial amount for CIL. However, there is no clarity on price pooling arrangement of the imported coal with domestic coal. Given the targeted output, we believe CIL will be able to deliver coal to the power plants above the 65% level and avoid any meaningful penalty. While further details of quantity of coal to be imported / price pooling etc are yet to be finalized, we believe that CIL wouldn’t suffer any financial losses on imports. The proposed benefit sharing framework under the new Bill will increase the tax incidence on the mining entities which intends to levy a tax of 26% on coal mining profits. But this will help Coal India take the benefit of getting the forest clearance faster.”

“At the CMP of Rs 359.10, the stock discounts its FY13E EPS of Rs 27.16 by 13.22 xs and it’s FY14E EPS of Rs 31.09 by 11.55 xs. Based on a targeted P/E multiple of 13.9x on FY2014E EPS of INR31.09 per share, we arrived at a target price of Rs 433.13 per share for the company i.e. an upside of 20.61%,” says Microsec research report.

Public holding more than 90% in Indian cos

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