Coal India - Buy on dips

Coal India is the largest producer and reserve holder of coal in the world with raw coal production of 431 million tonnes (MT). CIL operates 471 mines across 21 coalfields (this includes 163 open-cast mines, 273 underground mines and 35 mixed mines). The company produces coking and non-coking coal and also undertakes beneficiation of raw coal.

CIL transports approximately 47 per cent of sales volume through railways. Hence, availability of rake is of key importance. Historically, CIL has been facing a lot of issues on availability of rakes, which has led to lower offtake and higher inventory at the pit head.

In FY11, during the first half of the year availability of rakes was slightly lower (approximately 158 rakes per day [rpd]), whereas the full year average was approximately 162 rpd. However, in order to address this issue, the Indian Railways has assured CIL of higher availability of rakes. Rakes availability has improved in April 2011 to approximately 177 rpd from approximately 154 rpd in April 2010.

For May and June 2011 rakes availability has improved to approximately 166 rpd and approximately 161 rpd, respectively, from approximately 150 rpd each in May and June 2010.

CIL plans to add 20 new coal washeries (of which 15 would be non-coking coal and five would be coking coal) with a capacity of 111 MT. It currently has 17 coal washeries with a capacity of 39.4 MT. Washed coal commands higher realisation compared to raw coal. Hence, going forward, higher realisation due to higher sales from washed coal will lead to strong growth in revenues of CIL.

A major cost to CIL is wage cost, which accounts for approximately 47 per cent of the total cost (FY11). The national wage agreement IX is due in July 2011, which will subsequently lead to higher wage cost. However, CIL has been proactive and has undertaken a price hike in February 2011 (increase of approximately 12 per cent in blended realisations as compared to Q3FY11).

Even in case of a steeper increase in wage cost, we believe the company has enough levers & headroom to neutralise the impact. Hence, we expect CIL's EBITDA margin to remain intact at approximately 22 per cent.

Currently, as per Planning Commission estimates, the coal deficit in India in FY12 is expected at approximately 142 MT, indicating huge demand for coal. With the ramp up in production and liquidation of inventory, the revenues and profitability of CIL are slated to post healthy growth, going forward.

Since the listing the scrip has been doing wonders. Buy around 350 levels for a sure target of 450 in the next 6 months

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