Recommendation From Mining Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

Make your goal-Coal India

We are recommending Coal India (CIL) in this version of Choice Scrip as we see healthy volume growth backed by factors like government high appetite for coal consumption up to 1 billion tonnes from current level of 539 MT in FY16 and lower cost of production. The company’s capacity expansion and capex plan up to Rs 7700 crore in FY17 has been finalised. The price hike by CIL works well to improve on margins.

Union coal and power minister Piyush Goyal set a target of providing affordable electricity to all by 2019. The 80 per cent of electricity in India generated by thermal plants. CIL grabbed this opportunity promptly. The combination of policy related reforms, state-centre partnership, swift execution and close monitoring by the ministry has been helping CIL to turn into the largest coal miner of India. Going forward, we expect coal production to grow at a CAGR of 8 per cent in FY16-18. The company produces approximately 80 per cent of India’s total coal production and has a domestic market share of about 65 per cent.

CIL raises coal price by 6 per cent over the current price to reap the benefit of additional revenue of Rs 3234 crore for the balance FY17. CIL has  431 operational mines with planes further expansion. land acquisition and growth is smoothened and priorities. The company is now in possession of more than 5000 hectares of land.  It has increased budget by 2.5 times to Rs 60000 crore over a period of four years. CIL has capex plans of Rs 7700 crore in FY17. The management is also confident about achieving about 600 MT (up 11 % YoY) volume target by FY17. The company expects to commission six new coal washeries by September 2017. The construction of eight more washeries would commence shortly after it receives environmental clearances.

On financial front, CIL’s consolidated revenue increased by 0.3 per cent to Rs 21403 crore in Q4FY16. The company’s EBITDA has dropped by 7.23 per cent to Rs 5534 crore in Q4FY16 on yearly basis. Its net profit remained flat and stood at Rs 4248 crore in Q4FY16.

On a yearly front, CIL’s top line increased by 5.25 per cent to Rs 78010 crore in FY16. The company’s EBITDA too rose by 5.6 per cent to Rs 18306 crore in FY16 on yearly basis. Its bottom line also increased by 3.99 per cent to Rs 14274 crore in FY16 as compared to same period in previous fiscal year.

On valuation front, CIL’s PE 13.70x looks attractive as compare to Kabra Commercials’ (KCL) PE at 77.22x. The company’s EPS at 25.87x and operating profit margin looks healthy as compare at 10.51 per cent in FY16 to other peer companies like Gujarat Mineral Development Corporation (GMDCL), Gujarat NRE Coke and KCL.