Coal India Ltd (CIL) proposes to sell 10% stake in the offer-for-sale (OFS) at a floor price of Rs358 per share. Retail shareholders will get an additional discount of 5%, implying a floor price of Rs340.

Incorporated in 1973, Coal India Ltd (CIL) is the largest coal producer in the world with reserves of 65bn tonnes. The company produced 462MT and dispatched 472MT of raw coal in FY2014. CIL accounts for 81.1% of Indias overall coal production and commands ~74% of the Indian coal market. The company has 429 mines of which 237 are underground, 166 opencast and 26 are mixed mines.
Volume growth to drive revenues: The coal ministry is making all efforts to resolve issues related to various mining projects. For the first time, the government will be drawing mine-wise plans to help CIL achieve production targets. The government is also showing strong signs of acting swiftly on important reforms, such as land acquisition. Although, we do not expect CIL to achieve its production growth target of 12.2% (CAGR) over FY2014-20, with such support from the government, we expect production to grow at a CAGR of ~8% over FY2014-20, much higher than its historical CAGR of just 2.8% over FY2009-14.
Operating efficiencies and low realisations to help improve margins: CIL’s net realisation is significantly lower than the landed price of imported coal, providing enough cushion against any decline in international coal prices. The gap also provides ample scope for CIL to pass on any cost escalations. The increasing share of washed coal will also help improve realisations. Further, technological and infrastructural enhancements, coupled with operating efficiencies from rising production will help to keep production costs low.
Outlook and valuation: At the offer-for-sale (OFS) price of Rs358, the stock is available at ~11.4x the consensus FY2017E EPS of Rs31.4. Retail shareholders will get an additional discount of 5%, implying an OFS price of Rs340. At the OFS price for retail bidders, the stock is available at a P/E ratio of 10.8x consensus FY2017E EPS, which is attractive. We also believe, post issue, the overhang of the share sale on the price will be gone. Hence, we recommend investors to apply for CIL shares in the OFS.

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