Coal India Ltd (CIL) is the best play to ride on the increasing coal deficit in the country. CIL enjoys a near monopoly with a dominant 82% share in domestic coal production and is the world’s largest coal producing company. Being one of the lowest cost producers globally (US$16/ton) has enabled it to maintain healthy margins despite selling coal at a huge discount. We estimate OPM to expand 260bps over FY10-12 led by 1) 5.5% CAGR in volumes 2) improving product mix to align with market prices 3) cost savings measures and productivity improvement. These would drive earnings CAGR of 15.1% over FY10-12E.  At the upper band of Rs245, CIL would trade at 12.1x P/E and 6.4x EV/EBIDTA on FY12E. Employees and retail investors will be given the benefit of 5% discount on the final price. We believe CIL would trade at a premium, considering the lower earnings volatility, robust balance sheet and large resource base. We recommend ‘Subscribe’ to the issue with a fair value of Rs300.

Domestic deficit to widen to 25% of consumption by FY17
By FY17, India’s coal-based power generation is set to more than double from the current capacity of 84GW leading to an incremental demand of 396mn tons for coal (75% of current capacity). This, coupled with the expansion in the various sectors, would lead to an additional demand of 114mn by FY12 and 513mn tons by FY17. We estimate an increase of 341mn tons in coal supply over FY10-17, which is significantly lower than the demand. As a result, imports would jump 3x and would account for 25% of consumption by FY17.

Earnings to witness 15% CAGR over FY10-12; Subscribe
Led by an estimated 5.9% CAGR in volume and 4.2% CAGR in average realisations, we expect CIL’s topline to witness 11.1% CAGR over FY10-12. We estimate cost per ton to increase at a slower rate, as the impact of higher contractual expenses would be neutralized to some extent by rationalization of employee cost. OPM to expand by 240bps yoy to 26.4% in FY11E and to 26.6% in FY12E. The expansion in OPM would be restricted due to lower share of e-auction sales of total volumes. Expansion in OPM would lead to a 26% yoy increase in operating profits to Rs144bn in FY11 and further by 10% yoy to Rs158bn in FY12. This would drive earnings CAGR of 15.1% over FY10-12E.

Valuation summary