We are initiating coverage on Coal India Ltd (CIL), engaged in mining of non-coking coal and coking coal in India. Coal India is well poised for continuous growth driven by its positioning as the largest coal producer in world and improved demand on the back of higher need for power. Sustained growth prospects of the company are supported by the dominant position it enjoyed coupled with higher operating efficiency.

KEY INVESTMENT RATIONALE:

Dominant Player in Coal Industry

Coal India is the largest coal producer in the world not only in terms of production but the company also poses largest coal reserve standing over 18800mt.

Well placed to reap rich dividends on higher demand

The demand for non-coking coal is expected to grow at a CAGR of 9% from 428mt in FY07 to 651mt in FY12 backed by huge capacity planned from power sector in the near future. The deficit of thermal coal is expected to cross 100mt figure by FY12.

Strong Financial CIL enjoys a strong balance sheet in the form of cash surplus (after netting Debt) over Rs 37,000cr which would enable it to go for further capital expenditure.

Future Valuation: At the current price of Rs 317, the stock is trading at just 19.64x and 15.55x times of our estimated FY11E & FY12E earnings. We thus recommend a `BUY' with a target price of Rs 380, (We have valued CIL on DCF method). We considered FY10-FY12E as explicit period with cost of capital at 15.8% and arrived at an intrinsic value of Rs 374 per share.

The company operates 471 mines in 21 major coalfields across eight states in India, including 163 open cast mines, 273 underground mines and 35 mixed mines (includes both open cast and underground mines). They are also operating 17 coal beneficiation facilities with an aggregate designed feedstock capacity of 39.40 million tons per annum. In June 2010, the company has proposed development of a coal block in Indonesia in joint venture with the country's state sector. The company drives over 70% of its extractable coal reserves from 6 coal fields with Talcher coal field being the largest reserve block followed by korba coal field.