Rating Remains Buy Target price Reduced from 443 INR 417 Closing price 9 March 2015 INR 357 Potential upside +16.7% Anchor themes A yawning coal supply deficit in India, headroom to hike coal prices and impetus to augment output provide a long-term investment case for Coal India. Nomura vs consensus Our FY15F/FY16F earnings are 6%/15% below consensus. Our TP is 5% above consensus. Research analysts India Power & Utilities Anirudh Gangahar - NFASL [email protected]+91 22 4037 4516 Archit Singhal - NFASL [email protected]+91 22 4037 4008 Key company data: See page 2 for company data and detailed price/index chart Coal India COAL.NS COAL IN EQUITY: COAL Long-haul story largely intact; maintain Buy Persisting impetus to boost output bodes well; roadmap of rail links build-out would help more Action/Catalyst: Accumulate; 12-month total return potential of >20% Our recent meetings with policymakers and management suggest that while a bottom-up blueprint clearly spelling out external pre-requisites to double Coal India’s (CIL’s) production by FY20 was a much needed ‘first step’, a roadmap by GoI for build-out of rail links (evacuation infrastructure) is the need of the hour. Nevertheless, persisting impetus for greater engagement between Central / State / Local authorities to address factors constraining CIL’s output bode well, in our view. We expect a reasonable hike in FSA coal prices over the next 12-18 months (ahead of wage revisions due in FY2017) and EBITDA margin to be supported by recent moderation of diesel prices. Overhang of GoI divesting at least 4.65% stake in CIL to meet the minimum free float requirement looms, but we believe CIL remains a good long-haul story. Our SOTP-based revised TP is INR417 (down 6%), the implied 12-mth total return (including dividend yield) is 22%. FY15F/16F normalised EPS cut by 9%/16%; FY16F-20F offtake up by ~3% For FY15F/16F, we lower our normalised EBITDA estimate by 9%/14% and normalised EPS estimate by 9%/16%; FY15F-17F normalised EBITDA/EPS CAGRs are 12%/10%. In the backdrop of GoI’s ongoing impetus to double CIL’s production by FY20, we raise our FY16F-20F coal offtake forecast by 3.3% (our forecasts are considerably conservative vs. GoI’s blueprint for CIL), but we lower our FSA sales realization forecast by 6-13% over this period. Valuations: Multiples likely to remain at upper end of the historical range On normalised FY17F earnings, CIL trades at 6.6x EV/EBITDA and 10.6x P/E (EPS: INR33.5); 1-year forward multiples continue to hover in the upper end of respective historical ranges. CIL’s FY16F/17F FCFE yield is 4%/10%. For FY17F, relative to its Indonesian peers, CIL trades at a 7% premium on normalised EV/EBITDA but makes a higher RoE. Year-end 13 Mar FY14 FY15F FY16F FY17F Currency (INR) Actual Old New Old New Old New Revenue (mn) 688,100 738,415 708,518 805,524 755,230 862,975 Reported net profit (mn) 151,117 159,364 142,095 181,226 148,406 173,944 Normalised net profit (mn) 149,708 159,364 142,059 181,226 148,406 173,944 FD normalised EPS 23.70 25.23 22.49 28.69 23.50 27.54 FD norm. EPS growth (%) -13.4 5.5 -5.1 13.7 4.5 17.2 FD normalised P/E (x) 15.1 N/A 15.9 N/A 15.2 N/A 13.0 EV/EBITDA (x) 10.9 N/A 11.3 N/A 10.7 N/A 8.6 Price/book (x) 5.3 N/A 5.5 N/A 5.5 N/A 5.3 Dividend yield (%) 8.1 N/A 5.8 N/A 5.6 N/A 6.2 ROE (%) 33.3 35.8 33.9 37.3 35.9 41.5 Net debt/equity (%) net cash net cash net cash net cash net cash net cash Source: Company data, Nomura estimates Global Markets Research 10 March 2015 See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
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Rating Remains BuyTarget price Reduced from 443 INR 417
Closing price 9 March 2015 INR 357
Potential upside +16.7%
Anchor themesA yawning coal supply deficit in India, headroom to hike coal prices and impetus to augment output provide a long-term investment case for Coal India.
Nomura vs consensusOur FY15F/FY16F earnings are 6%/15% below consensus. Our TP is 5% above consensus.
Key company data: See page 2 for company data and detailed price/index chart
Coal India COAL.NS COAL IN
EQUITY: COAL
Long-haul story largely intact; maintain Buy
Persisting impetus to boost output bodes well; roadmap of rail links build-out would help more Action/Catalyst: Accumulate; 12-month total return potential of >20% Our recent meetings with policymakers and management suggest that while a bottom-up blueprint clearly spelling out external pre-requisites to double Coal India’s (CIL’s) production by FY20 was a much needed ‘first step’, a roadmap by GoI for build-out of rail links (evacuation infrastructure) is the need of the hour. Nevertheless, persisting impetus for greater engagement between Central / State / Local authorities to address factors constraining CIL’s output bode well, in our view. We expect a reasonable hike in FSA coal prices over the next 12-18 months (ahead of wage revisions due in FY2017) and EBITDA margin to be supported by recent moderation of diesel prices. Overhang of GoI divesting at least 4.65% stake in CIL to meet the minimum free float requirement looms, but we believe CIL remains a good long-haul story. Our SOTP-based revised TP is INR417 (down 6%), the implied 12-mth total return (including dividend yield) is 22%.
FY15F/16F normalised EPS cut by 9%/16%; FY16F-20F offtake up by ~3% For FY15F/16F, we lower our normalised EBITDA estimate by 9%/14% and normalised EPS estimate by 9%/16%; FY15F-17F normalised EBITDA/EPS CAGRs are 12%/10%. In the backdrop of GoI’s ongoing impetus to double CIL’s production by FY20, we raise our FY16F-20F coal offtake forecast by 3.3% (our forecasts are considerably conservative vs. GoI’s blueprint for CIL), but we lower our FSA sales realization forecast by 6-13% over this period.
Valuations: Multiples likely to remain at upper end of the historical range On normalised FY17F earnings, CIL trades at 6.6x EV/EBITDA and 10.6x P/E (EPS: INR33.5); 1-year forward multiples continue to hover in the upper end of respective historical ranges. CIL’s FY16F/17F FCFE yield is 4%/10%. For FY17F, relative to its Indonesian peers, CIL trades at a 7% premium on normalised EV/EBITDA but makes a higher RoE.
Liquidity (x)Current ratio 1.54 1.36 1.29 1.17 1.13Interest cover 360.2 240.8 2,149.3 2,440.4 3,057.9LeverageNet debt/EBITDA (x) net cash net cash net cash net cash net cashNet debt/equity (%) net cash net cash net cash net cash net cash
In order to facilitate comparability with peers, unless otherwise stated in this report, normalised EBITDA = reported EBITDA + provisioning for OB (Overburden Removal Adjustment – a non-cash accounting adjustment adopted by CIL) + income from surface transport & loading charges (CIL includes this within ‘non-operating income’). Normalised PAT/EPS implies reported PAT/EPS excluding prior period / extraordinary items + provisioning for OB; accordingly, there is a variation in reported and normalised RoE.
Investment summary – Long-haul story intact; maintain Buy
Based on our recent meetings with policymakers and management, we believe doubling CIL’s production by FY2020 seems quite ambitious at this stage; output would be contingent upon augmentation of evacuation capacity (ie, rail infrastructure) rather than ability to produce and ground-level progress on build-out of key rail links + wagon availability/loading is more critical. Further, as matters related to land acquisition / possession, rehabilitation & resettlement (R&R) and evacuation (rail links) need substantial coordinated heavy lifting by Central/State authorities, the risk of delays cannot be undermined.
However, we maintain our constructive outlook on CIL considering: [1] persistent impetus led by the Government of India (GoI) to substantially boost coal output from CIL over the next five years; [2] headroom to raise linkage (notified) coal prices as ex-mine cost of coal to consumers is still 35-45% below CIF price of GCV-adjusted comparable imported coal (blended realization is 30-40% below GCV-adjusted comparable CIF coal prices); [3] likelihood of maintaining healthy FCF and a significant cash chest available for deployment towards boosting production/offtake (including evacuation infrastructure & equipment) and a high dividend payout and [4] ongoing coal block auctions + potential ‘auction of coal linkages’ enabling price discovery of CIL’s coal resources (including >10bn tons of proven coal reserves).
Valuation is arguably not compelling (on normalised FY17F earnings, CIL trades at 6.6x EV/EBITDA and 10.6x P/E), but we believe CIL’s 1-year forward earnings multiples would sustain at the upper end of its respective historical ranges on prospects of: [1] higher y-y growth in output (offtake); [2] reasonable hike in FSA coal prices over the next 12-18 months (ahead of wage revisions due in FY2017) and [3] EBTIDA margin being supported by recent moderation in diesel prices.
While we raise our FY16F-20F coal offtake forecasts for CIL by 3.3% (our forecasts are considerably conservative vs. CIL’s five-year production roadmap), we lower our FSA sales realisation forecast by 6-13% over this period. Incorporating this along with CIL’s 9MFY15 financials, we lower FY15F/FY16F normalised EBITDA by 9%/14% and normalised EPS by 9%/16%; our FY15F-17F normalised EBITDA/EPS CAGR is 14%/11%. Our FY15F/16F/17F reported EPS are 6%/15%/11%, respectively – we think this may largely be attributable to our arguably conservative forecast of blended realizations being flat y-y in FY16F (we assume hike in notified prices would be towards end-FY16F, with the majority of the impact showing up in FY17F).
We continue to calculate the fair value on the SOTP-based value of CIL’s proven coal reserves + value of its probable reserves & resources + forecast one year forward cash on hand . Our SOTP-based revised 12-mth TP is INR417 (down 6%), implied 12-month total return (including dividend yield) is 22% from current levels. Fig. 1: CIL – Price target build-up Cash flows from proven and probable reserves (including cash on hand) account for ~80% of our TP
Note: We lower our WACC for CIL to 12.2% vs. 12.5% previously on the back of the reduction in the risk free rate to 7.7% (vs. 8.5% previously), partially offset by higher beta
Source: Company data, Nomura estimates
Equity value (INR/share) New Old % change Comments and changes if any[1] Proven + Probable reserves 329 370 (11.0)
PV of Cash Flows (Proven) 190 234 (18.8) PV of projected cash f low s: Year #1 = FY17 (vs. FY16 previously)Add: Net cash 78 94 (16.9) Net cash as of FY16 (vs. FY15 previously)Probable reserves 61 42 45.0 PV of projected cash f low s post FY2026 (vs. FY2027 previously)
[2] Resources (excl. Reserves) 88 73 20.9 0.3x value of probable reserves (per ton)Target Price 417 443 (5.8)
Nomura | Coal India 10 March 2015
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Fig. 2: CIL – Nomura vs. Consensus Our FY15F/16F Net Profit are ~6%/~15% below consensus
Source: Bloomberg, Nomura estimates
Fig. 3: CIL – Normalised vs. Reported financials We believe normalised financial metrics are more representative
Note (1): Normalised EBITDA = Reported EBITDA + OB Removal Adjustment + Surface Transport and Loading charges
Note (2): Normalised PAT = Reported Net Profit excluding extraordinary/prior period items + OB Removal Adjustment
Source: Company data, Nomura estimates
Fig. 4: Coal India – Key events and share price performance The stock rally (post elections) was on the back of the infra-focussed BJP-led Government at the Centre
Source: Bloomberg, Nomura research
Fig. 5: CIL – Revenues and offtake mix Revenue contribution from e-auction to decline due to lower volumes
Source: Company data, Nomura estimates
Fig. 6: CIL – Blended ASP at steep discount to global prices Gross FSA ASP 35-45% below ex-INA CIF price of comparable GCV coal
Source: Calculations are based on CIF prices of ex-Indonesia comparable GCV coal at port vs. ex-mine cost of CIL coal to customers (after adding royalties / excise duties / levies to Net Realization of CIL)
% of raw coal soldE-auction coal 12.7 9.6 9.0 8.4 At notif ied prices 86.6 89.8 90.4 91.0 Others 0.7 0.6 0.6 0.6
% of total offtakeE-auction coal 12.3 9.3 8.8 8.2 Beneficiated coal 2.7 2.4 2.3 2.2 At notif ied prices 84.2 87.5 88.2 88.9 Others 0.7 0.6 0.6 0.6
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$/ton
Nomura | Coal India 10 March 2015
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Fig. 7: CIL – Key operating metrics We expect offtake and blended realization to post a 5.9% / 1.9% CAGR during FY14-17F
Note: [1] Cash cost of production = Total opex less provision/write-offs and OB removal adjustment, [2] Cost metrics calculated on production whereas realization/EBITDA/PAT is calculated on offtake, [3] INR/USD taken as 60.0 from FY16F onwards | Source: Nomura estimates
Fig. 8: CIL – Earnings and TP sensitivity to key operating/financial assumptions Earnings are highly sensitive to blended realisation and offtake
E-auction coal (% of raw coal sold)Base case 27.8 29.3 33.5 417 +1% change 28.4 29.9 34.2 424 -1% change 27.2 28.6 32.8 410 Sensitivity to 1% variation (%) 2.3% 2.1% 2.0% 1.7%Realization of e-auction coalBase case 27.8 29.3 33.5 417 +1% change 27.9 29.4 33.7 419 -1% change 27.7 29.1 33.4 416 Sensitivity to 1% variation (%) 0.4% 0.4% 0.4% 0.3%
Adj. FCFF (INR/sh)
Norm. EPS (INR/share)
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Key risks to our investment thesis (earnings outlook, price target) for CIL • Inability to raise notified coal prices due to regulatory/policy diktats, particularly as the
Power Ministry (representing the largest consumer segment) and the Coal Ministry are headed by a common Minister. Ceteris paribus, if notified coal price is unchanged from FY15F level of INR1298/ton (ex-incentives) in FY16 and FY17, CIL’s EPS would drop by 6%/27%, respectively; thereafter, assuming prices are revised to sustain EBITDA/ton, the fair value of the stock would drop to INR316/share (24% below our base-case TP for the stock).
• Adverse policy decisions by the GoI such as: [1] putting notified price setting under the ambit of the Coal Regulator; [2] curtailing offtake via e-auction and [3] directing the deployment of cash in unrelated / sub-optimal avenues.
• Inability of authorities (GoI, Governments of coal-bearing States, local officials) to augment rail infrastructure (rake availability, line capacity and key rail links) in the indicated timelines required by CIL to augment output (offtake) in tandem with the five-year production roadmap.
• Production/offtake growth shortfall prevents CIL from supplying minimum domestic coal committed under FSAs and GoI rules out a reset of these thresholds – leading to penalties.
• Lingering overhang of another round of disinvestment via a follow-on offering (FPO) by the GoI in order to enable CIL to meet the minimum 25% free float requirement stipulated by the capital markets regulator (SEBI) by mid-2017.
Key changes to our earnings assumptions
FY16F-20F coal offtake assumption raised by 3.3%, implied CAGR is ~8% Capturing the feedback from our recent meetings with management and policymakers on GoI’s roadmap to double CIL’s production over the next five years, we estimate its coal production to grow from 494mt in FY15F to 722mt in FY20F (vs. GoI’s target of 1bn tons) and raise CIL’s FY16F-20F total coal offtake forecast by 3.3%, implying a CAGR of ~8% over this five-year period. Our revised forecasts imply a 6.7%/7.0%/7.5% y-y growth in production and 3.3%/6.8%/7.7% y-y growth in offtake in FY15F/FY16F/17F, respectively.
E-auction sales: Building in 45mt volume, higher realisation during FY15F-17F We lower our forecast trajectory for CIL’s e-auction sales volume as a proportion of total offtake to 9.6%/9.0%/8.4% in FY15F/FY16F/17F (10.4%/9.3%/8.9% previously) and thereafter progressively reducing to ~5% (vs. ~7% previously). On our higher total offtake forecast, we now expect e-auction sales volume to hover at 45-47mtpa during FY15F-20F (vs. 48-50mtpa previously). Combining 9MFY15 e-auction sales realization, the widely expected uptick in manufacturing-centric economic activity (which bodes well for e-auction coal demand), and a persistent benign outlook for seaborne thermal coal prices, we raise our FY15F/FY16F/17F e-auction sales realization assumption by 16%/7%/3% respectively. Our longer-term e-auction sales realization assumption is sharply lower, in sync with our higher offtake forecast for CIL.
Beneficiated coal: Volume forecast for FY15/FY16/17 lowered, realisation tweaked Combining 9MFY15F washed (beneficiated) coal sales offtake and continuing to build in new washeries capacity of 10mtpa kicking in during FY17-18, we lower our beneficiated (washed) coal sales volume forecast by 11%/10%/6% in FY15F/FY16F/17F. Our revised washed coal realization forecast for CIL is +1%/-3%/+3% in FY15F/FY16F/17F.
FSA sales realisation forecast (including year-end incentives) lowered We lower our FSA sales realisation forecast (including incentives) for FY15F/FY16F by 4.3%/6.2% to factor in [1] No hike in notified coal prices this year, ie, in FY15 and [2] an effective hike of ~2% in FSA prices next year (vs. 4% previously). However, we continue to believe that CIL would materially raise notified coal prices over the next 12-18months as 5/10 yearly wage revisions for workers/executives are scheduled in FY2017. Our revised FSA sales realisation forecast (including incentives) for FY15F and FY16F is INR1312/ton (flat y-y) and INR1334/ton (up 1.7% y-y).
Nomura | Coal India 10 March 2015
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Capex/investment assumed at INR100bn in FY16F, INR55bn thereafter Relative to CIL’s target capex of INR120bn (including INR60bn earmarked towards rail / infrastructure investments) in FY16, we build in a capex of INR100bn (including INR45bn towards rail/infrastructure and investment into arguably unrelated business lines on which we do not build in any return). Thereafter, in light of GoI’s roadmap to double CIL’s production in five years, we raise our annual capex target to INR55bn (vs. INR45bn previously).
GoI’s move to cut corporate tax rate from 30% to 25% during FY17-20 factored in Our earnings estimates factor in the proposals relating to taxes (direct and indirect) proposed in GoI’s FY2015-16 Budget, which was presented recently. Overall, we expect the effective tax rate for CIL to drop from ~35% in FY15 and FY16 to ~30% by FY20F.
Fig. 9: CIL – Change in price realisation We reduce our blended ASP forecasts by 2%/5% for FY15F / FY16F
Source: Company data, Nomura estimates
Fig. 10: CIL – Change in offtake We lower our FY15F/FY16F offtake target marginally by ~2%
Source: Company data, Nomura estimates
Fig. 11: CIL – Change in key financials We lower our FY15F/FY16F adjusted profit forecasts by 9%/16%
Note: [1] ‘Old’ EBITDA/Net Profit/EPS figures exclude the impact of mining tax (assumed in our base case previously) to facilitate better comparability of changes to our forecast. [2] We add Surface Transport and Loading charges along with OB removal to arrive at ‘Normalised’ EBITDA | Source: Company data, Nomura estimates
Fig. 12: CIL – Change in key financials We lower our FY15F/FY16F reported profit forecasts by 11%/18%
Note: [1] ‘Old’ EBITDA/Net Profit figures exclude the impact of mining tax (assumed in our base case previously) to facilitate better comparability of changes to our forecast. [2] *Non-operating Income includes Surface Transport and Loading charges | Source: Company data, Nomura estimates
(Rs/ton) FY15F FY16F FY17FE-auction coal
New 2,531 2,383 2,408 Old 2,178 2,230 NA% change 16.2 6.9
Key operational / financial metrics Fig. 13: CIL – Employee cost accounts for ~40% of sales Staff costs to escalate by ~3-6% over FY15F/16F
Source: Company data, Nomura estimates
Fig. 14: CIL – Employee productivity We expect a natural attrition of 9-12k employees up to FY17F
Source: Company data, Nomura estimates
Fig. 15: CIL – RoE and Cash (% of total assets) We expect Normalised RoE to rise to 26-28% during FY15-17F
Note: Normalized RoE is calculated post OB removal adjustment | Source: Company data, Nomura estimates
Fig. 16: CIL – Norm. non-operating income at ~25% of PBT Share of normalised non-operating income in PBT to drop in FY16F/17F
Note: Non-operating income is Normalised for Surface Transport and Loading charges | Source: Company data, Nomura estimates
Fig. 17: CIL – FCF generation and yield We expect CIL’s FCF generation to improve sharply in FY17F
Source: Company data, Nomura estimates
Fig. 18: CIL – Subsidiary-wise coal inventory (mn tons) Overall inventory at 44.4mt as of 11MFY15 (vs. 49.3mt as of FY14)
Source: Company data, Nomura estimates
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Fig. 19: CIL – Comparison with regional peers on key parameters On the outlook for earnings growth and RoE, CIL stacks up favourably relative to its peers in INA/CHN
Note: All financials as of CY2013; EPS / EBITDA CAGR numbers are Nomura estimates for CIL and Bloomberg estimates for the others; Resources / Reserves data have been taken from respective company websites; For CIL, CY13/14 corresponds to FY14/15 respectively. NR’ = Not Rated
Source: Company data, Nomura research, Bloomberg
Five-year roadmap for offtake, rather than production is the need of the hour
Our multiple interactions with policymakers and the CIL management over the past few months reiterates that offtake growth (evacuation capability, railway infrastructure and demand) is a bigger concern vs. growth in production. Nevertheless, preparing a bottom-up roadmap for production ramp-up over the next five years was a necessary exercise to explicitly state the constraints (internal and external) that need to be removed to augment coal output at a double-digit growth rate.
As per our understanding, Figure 21 contains the five-year production roadmap of CIL’s key subsidiary-wise production – envisaged production in FY20 aggregates 908mt, the balance 92mt is expected to be filled up by new projects to be identified over the next two-three years. Notable aspects of the production roadmap include –
• Expectedly, envisaged output growth is back-ended; y-y growth in both FY19 and FY20 is pegged at ~17%.
• Bulk of the production is expected to come from ‘ongoing projects’ ie, operational projects wherein capacity expansion to peak/plateau production levels is underway. Contribution from ‘future projects’ i.e. new projects is expected to be minimal in FY16 and FY17, but expected to by 20% in FY2020.
• CIL’s largest subsidiaries (in terms of output) – MCL and SECL – are expected to contribute ~60% of the envisaged increase in production between FY15-20. For FY16, MCL is expected to contribute ~50% of the incremental output – major mines contributing to the 25mt+ increase would be Bharatpur, Ananta and Kulda. Incremental contribution from SECL is contingent upon securing Environment Clearance (EC) for expanding capacity of the Kushmunda mines to 51mtpa.
• Besides enhanced and timely availability of rail links and evacuation capacity (rakes), GOI facilitating acquisition/possession of land (including R&R) and streamlining the process to secure Forest Clearances (FCs) are the two major pre-requisites cited in the roadmap.
As regards the critical aspect on augmentation of rail infrastructure, feedback from our meetings suggests that increasing engagement between officials of Coal Ministry + Railway Ministry + State Government + Local Authorities + CIL subsidiaries, and expertise / insight of Mr. A.K. Maitra (Ex-Member of GoI’s Railway Board), who has recently joined CIL as an Advisor for railway projects, would yield in accelerating ground-level progress in boosting evacuation capability, particularly in respect of sorting out lingering impediments in several work-in-progress spur rail links.
As regards the three trunk rail links (Jharkhand, Odisha and Chhattisgarh), the Jharsuguda-Barpali-Gopalpur-Manoharpur line in Odisha is expected to become operational in CY2016 whereas the first leg of the Tori-Shivpur-Kathotia line (Jharkhand) and the Bhupdevpur-Korba ‘Eastern Corridor’ (Chhattisgarh) are expected to be operational in CY2017.
Company CIL ADRO BUMI ITMG PTBA Shenhua China Coal YanzhouTicker COAL IN ADRO IJ BUMI IJ ITMG IJ PTBA IJ 1088 HK 1898 HK 1171 HKRating Buy NR NR NR NR Neutral Reduce NRReserves (bn tons) 16.4 0.9 2.9 0.4 2.0 9.0 8.7 5.7 Resources (bn tons) 61.7 4.7 10.8 1.6 7.3 25.1 19.5 18.5 EBITDA margin 23.2% 23.6% 6.9% 15.4% 19.4% 31.9% 14.7% 15.9%Net margin 22.0% 7.0% -23.3% 10.3% 15.4% 15.9% 4.6% 1.4%RoE 33.2 8.2 na 22.3 26.0 16.2 1.6 7.4CY13-15F EBITDA CAGR 2.4% -1.7% 58.2% -0.6% 6.3% -8.3% -5.7% -9.7%CY13-15F EPS CAGR -0.4% -1.6% na -6.0% 2.8% -11.1% -48.8% 21.2%
Nomura | Coal India 10 March 2015
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Fig. 20: CIL – production targets vs. Nomura estimates CIL targets imply FY16-20F CAGR of 13.5% (vs. our estimate of 8%)
Source: Nomura estimates, Sigma Insights
Fig. 21: CIL – Subsidiary wise production targets All subsidiaries except NCL/WCL target a double digit CAGR for FY16-20
Source: Nomura estimates, Sigma Insights
TP based on DCF of proven reserves + fair value of resources
We continue to calculate the fair value for the stock on the SOTP-based value of CIL’s proven coal reserves + value of its probable reserves & resources + forecast one year forward cash on hand.
SOTP-based 12-month TP is pegged at INR417 Our 12-month TP for CIL (INR417) is derived from a sum-of-the-parts of: [1] FCFF of its 7.6bn tons of proven coal reserves as of FY16F (INR190/share), [2] PV of its 8.3bn tons probable coal reserves (INR61/share), [3] Fair value of its balance coal resources (45.4bn tons as per the JORC Code) at INR88/share, and [4] FY16F cash on hand (INR78/share). At this stage, we assign a zero value to the INR45bn earmarked for investment by CIL in railway and infrastructure-linked projects (and built into our model as cash outgo) on account of limited earnings visibility on the same.
• As regards our FCFF-based value of CIL’s coal reserves, we lower our assumption for WACC to 12.2% (vs. 12.5% previously) on the back of the 80bps decline in risk-free rate (7.7% vs. 8.5% previously), partially offset by a higher one/two year beta. Our explicit earnings forecast period for CIL extends up to FY2026 (when we expect CIL’s proven coal reserves to get exhausted).
• In lieu of pegging a terminal cash flow value, we continue to assess the fair value of CIL’s probable coal reserves and balance coal resources in arriving at our fair value for the stock.
– We assume that two-thirds of CIL’s probable coal reserves would be converted into proven/extractable reserves and derive its fair value based on the PV of cash flows emanating from these reserves post FY2026 (year in which proven reserves get exhausted, as per our production forecast.
– Assuming a 30% resource-to-probable reserve conversion ratio and 2/3rd of the probable reserves being extractable, we peg the value of CIL’s balance coal resources (45.4bn tons) effectively at 20% of the value of CIL’s probable reserves on a per ton basis. We note that as per the ISP guidelines applied by CIL to assess its coal reserves and resources, CIL’s extractable reserves are 33% of its total geological resources and 70% of its geological resources where mining studies have been completed – suggesting that the value assigned to the resources is reasonable.
At its CMP, in addition to the 17% potential upside to our TP, we note that the stock offers a dividend yield of 5.6% (we forecast a dividend of INR20/share for FY16, largely in line with the interim dividend declared by CIL in February 2015), implying a total potential return of 22.4%. CIL offers and FCFE yield of 4%/10% for FY16F/FY17F respectively; the low FCFE yield in FY16F is on account of assuming zero returns on the INR45bn earmarked for investment into rail and infrastructure (built into our model) that year.
Valuations multiples are not cheap, but may remain at upper end of historical range if investors view the stock from a 2-3year perspective Over the past 12 months, CIL’s stock price has moved up by 38% (vs. 32% for the BSE Sensex) and multiples on FY16F/FY17F normalised earnings (ie, EV/EBITDA and P/E) are no longer cheap; one-year forward multiples are at the upper end of their historical ranges (Figure 23-26). However, we believe the multiples may well sustain at around current levels as investors would continue to look at the earnings/valuations from a 2-3 year perspective as actual groundwork by the GoI to double CIL’ production in the next five years gains visibility.
Relative to the average valuation multiples of government-owned power utilities in India, CIL currently trades at a 17%/26% discount on normalised FY17F P/E and EV/EBITDA respectively; however, normalised RoE is significantly higher. Relative to its Indonesian peers, for FY17F (CY16F for Indonesian players) although CIL trades at a 7% premium on normalised EV/EBITDA (40% premium on normalised P/E); it generates a significantly higher RoE, thereby justifying its valuation premium. We note that on resource-based valuation, at US$1.6 EV/ton of reserves and US$0.4 EV/ton of resources, CIL still appears cheaper, relative to most of its global peers.
Fig. 22: CIL – Price target calculation Cash flows from proven and probable reserves (including cash on hand) account for ~80% of our TP
Source: Company data, Nomura estimates
Note: For calculating the value for resources, we assign a value of 0.3 times the probable reserves (considering 67% conversion ratio)
Fig. 23: CIL – 1year fwd P/E (Reported) CIL trades at a 1-year fwd P/E of 15.2x
Source: Bloomberg, Nomura estimates
Fig. 24: CIL – 1year fwd P/E (Normalised) CIL trades at a 1-year fwd normalised P/E of 12.2x
Source: Bloomberg, Nomura estimates
Fig. 25: CIL – 1year fwd EV/EBITDA (Reported) CIL trades at a 1-year fwd EV/EBITDA of 10.7x
Source: Bloomberg, Nomura estimates
Fig. 26: CIL – 1yr fwd EV/EBITDA (Normalised) CIL trades at a 1-year fwd EV/EBITDA of 7.9x
Source: Bloomberg, Nomura estimates
Fig. 27: CIL – 1yr fwd P/E vs. BSE Sensex, RIL and ONGC CIL's 1-yr fwd P/E is ahead of RIL and ONGC
Note: Data based on reported EPS of CIL | RIL = Reliance Industries
Source: Bloomberg, Nomura estimates
Fig. 28: CIL – Dividend yield vs. GOI 10yr bond yield CIL currently offers 5-6% dividend yield
Note: CIL declared a high interim dividend of INR29/share in 4QFY14
Source: Bloomberg, Nomura estimates
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10yr GoI Bond Yield CIL's 1yr Fwd Dividend Yield
Nomura | Coal India 10 March 2015
13
Fig. 29: CIL – Regional valuation comparison CIL trades at a ~30% premium to its South-east Asian peers on CY15F EV/EBITDA (normalised). ~25% discount on CY15F P/E (normalised)
Note: [1] Priced as on March 09, 2015 for all companies except US-listed peers (priced as on March 06, 2015); [2] CIL numbers are adjusted for provisioning of OB removal; [3] US coal companies have Dec-ending fiscal year, hence for these companies, CY14=FY15
Source: Bloomberg, Bloomberg estimates for Not rated stocks, Nomura estimates for rated companies
M. Cap Price (US$m) (Local) CY14F CY15F CY16F CY14F CY15F CY16F
Coal IndiaCoal India - Normalized COAL IN Buy 36,084 357.3 12.9 12.2 10.7 8.4 7.9 6.6 Coal India - Reported COAL IN Buy 36,084 357.3 15.9 15.2 13.0 11.3 10.7 8.6
At Target priceCoal India - Normalized Buy 15.0 14.3 12.4 10.2 9.6 8.0 Coal India - Reported Buy 18.5 17.7 15.1 13.8 12.9 10.5
India Power UtilitiesNTPC NTPC IN Buy 20,013 151.8 14.3 13.7 12.8 11.1 10.2 8.9 PWGR PWGR IN Buy 12,568 150.3 13.1 11.4 na 8.8 7.7 naNHPC NHPC IN NR 3,505 19.8 9.4 9.2 na 7.7 7.6 naAverage 12.3 11.4 12.8 9.2 8.5 8.9
HKShenhua Energy-H 1088 HK Neutral 56,449 19.2 5.8 5.8 5.7 3.3 3.2 3.1 Chinacoal Energy-H 1898 HK Reduce 11,281 4.0 6.3 7.2 6.0 5.9 6.1 5.4 Yanzhou-H 1171 HK NR 7,559 6.2 15.6 21.3 17.5 9.8 9.4 8.8
Average 9.3 11.4 9.7 6.3 6.2 5.8
S.E.AsiaBumi BUMI IJ NR 253 90 NM NM NM 7.2 7.5 9.7 ITMG ITMG IJ NR 1,455 16,800 9.4 8.1 8.6 4.6 4.2 4.3 Bukit Asam PTBA IJ NR 1,902 10,775 12.7 11.0 9.9 9.5 8.1 6.7 Indika Energy INDY IJ NR 186 466 NM 35.7 3.6 5.4 5.2 5.0 Adaro ADRO IJ NR 2,426 990 8.4 10.8 7.6 4.8 5.5 4.9 Average 10.2 16.4 7.4 6.3 6.1 6.1
AustraliaWhitehaven Coal WHC AU NR 2,152 1.6 NM 64.8 15.9 23.8 10.7 7.5 New Hope Corp NHC AU NR 2,765 2.6 NM 46.7 30.6 19.9 13.0 8.4 Average NA 55.8 23.2 21.9 11.8 8.0
North AmericaArch Coal ACI US Reduce 234 1.1 NM NM na 16.5 12.8 naConsol Energy Inc. CNX US Buy 6,784 29.5 27.8 16.1 na 9.5 7.3 naPeabody Energy Corp. BTU US Reduce 1,759 6.4 NM NM NM 9.2 8.9 7.5 Walter Energy Inc WLT US Neutral 63 0.9 NM NM na 59.4 21.3 naAlpha Natural Resources ANR US Neutral 246 1.1 NM NM NM 17.6 20.5 14.4 Teck Resources TCK US Neutral 8,304 14.4 19.5 12.6 9.4 9.3 7.6 6.5
Average 23.6 14.3 NM 20.2 13.1 9.5
Company Ticker RatingEV/EBITDAP/E
Nomura | Coal India 10 March 2015
14
Fig. 30: CIL – Regional valuation comparison (contd.) CIL trades at a significant discount to peers on resources/reserves based valuations
Note: [1] Priced as on March 09, 2015 for all companies except US-listed peers (priced as on March 06, 2015); [2] CIL numbers are adjusted for provisioning of OB removal, [3] R1=Resources and R2=Reserves
Source: Bloomberg, Bloomberg estimates for Not rated stocks, Nomura estimates
Coal IndiaCoal India - Normalized COAL IN 25.7 25.9 28.0 5.8 5.6 6.2 0.4 1.6 Coal India - Reported COAL IN 33.9 35.9 41.5 5.8 5.6 6.2
At Target priceCoal India - Normalized 25.7 25.9 28.0 5.0 4.8 5.3 0.5 1.9 Coal India - Reported 33.9 35.9 41.5 5.0 4.8 5.3
India Power UtilitiesNTPC NTPC IN 10.1 10.0 10.4 3.8 3.8 4.0 PWGR PWGR IN 15.0 15.6 na 2.1 2.4 naNHPC NHPC IN 7.6 7.5 na 3.6 3.7 naAverage 10.9 11.0 10.4 3.2 3.3 4.0
S.E.AsiaBumi BUMI IJ NM (3.4) NM - - na 0.4 1.6 ITMG ITMG IJ 16.7 19.2 17.9 9.0 9.6 9.2 0.8 3.1 Bukit Asam PTBA IJ 21.5 22.6 24.0 4.0 4.5 4.3 0.2 0.9 Indika Energy INDY IJ (0.6) 1.1 7.2 n/a - 8.4 0.6 1.4 Adaro ADRO IJ 9.1 7.6 8.9 2.6 2.6 2.6 0.9 4.5 Average 11.7 9.4 14.5 3.9 3.3 6.1 0.6 2.3
AustraliaWhitehaven Coal WHC AU (1.2) 0.7 3.0 0.1 0.3 1.5 0.9 3.7 New Hope Corp NHC AU 0.9 1.7 2.9 3.8 4.1 4.2 0.5 2.0 Average 0.5 2.9 2.9 2.0 2.2 2.8 0.7 2.9
North AmericaArch Coal ACI US (19.1) (19.3) na 0.9 0.9 na 0.9 2.2 Consol Energy Inc. CNX US 4.6 7.0 na 0.8 0.8 na 3.5 10.6 Peabody Energy Corp. BTU US (9.0) (7.0) (6.0) 5.3 5.3 5.3 0.9 1.8 Walter Energy Inc WLT US NM NM NM 4.6 4.6 na 6.6 10.6 Alpha Natural Resources ANR US (11.7) (25.2) (29.2) - - - 0.7 1.4 Teck Resources TCK US 2.8 4.3 5.6 5.0 5.0 5.0 3.7 12.3
Average (6.5) (8.0) (9.9) 2.8 2.8 3.4 2.7 6.5
Company TickerDiv yield (%)ROE (%)
Nomura | Coal India 10 March 2015
15
Appendix A-1
Analyst Certification
I, Anirudh Gangahar, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.
Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Coal India COAL IN INR 357 09-Mar-2015 Buy N/A
Coal India (COAL IN) INR 357 (09-Mar-2015) Rating and target price chart (three year history)
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our 12-month TP for CIL (INR417) is derived from a sum-of-the-parts of [1] FCFF of its 7.6bn tons of proven coal reserves as of FY16F (INR190/share), [2] PV of its 8.3bn tons probable coal reserves (INR61/share), [3] Fair value of its balance coal resources (45.4bn tons as per the JORC Code) at INR88/share, and [4] FY16F cash on hand (INR78/share). The benchmark for this stock is the Sensex Index. Risks that may impede the achievement of the target price Key risks include [1] Inability to revise notified coal prices due to regulatory/policy diktats, [2] Production/offtake growth shortfall rendering CIL unable to supply minimum domestic coal committed under FSAs, leading to penalties, [3] Buildout of the three trunk rail links is delayed, [4] Lingering overhang of another round of disinvestment to meet the minimum 25% free float requirement by SEBI, [5] Adverse policy decisions by GOI such as curtailing offtake via e-auction, putting notified price setting under the ambit of the Coal Regulator etc.
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