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The Biggest Fish

Coal India is expected to perform well in the long-term, but wait for valuations to correct before investing…

Recently Coal India toppled Reliance Industries to become India’s biggest company by market capitalisation. Is this a good time buy this stock?
- Abhishek

It is true that within 10 months of its listing on the bourses, Coal India dethroned Reliance Industries on August 17, 2011 to become the country’s most valuable company by market capitalisation. But after four days it slipped to second rank and Reliance Industries regained its leadership position. Coal India (CIL) is the world’s largest coal producing company. It is basically a holding company which has 11 direct and indirect subsidiaries, of which nine are involved in coal production.

On a consolidated basis, the company has registered a five-year compounded annual growth rate (CAGR) in total income of 14.8 per cent. Over the same period, its operating profits and profit after tax have grown at a CAGR of 12.3 per cent and 13.2 per cent respectively. CIL managed to go from negative free cash flow in FY09 to positive in FY10. In FY11 the company’s free cash flow grew 64.2 per cent as compared to FY10.
CIL has managed a five-year average return on capital employed (RoCE) of 44.6 per cent and five-year average return on net worth (RoNW) of 30.4 per cent. Its operating profit margin has averaged 27.4 present while net profit margin has averaged 14.4 per cent over the last five years.

CIL got listed in November 2010 at a listing price of Rs 342. Since its listing (till August 23, 2011), the stock has delivered a return of 14.5 per cent, and is currently trading at Rs 391.9. It is currently trading at a 12-month trailing price-to earnings (P/E) ratio of 52.7. The median PE for the mines and minerals industry is 10.5. CIL’s close competitors such as MOIL, NMDC and Sesa Goa are currently trading at P/Es of 8.65, 12.9 and 6.28 respectively. Therefore, compared to its industry and peer group, CIL’s valuation looks quite expensive.

The company’s management expects production to grow at the rate of 5 per cent annually during the 12th five-year plan. The company is targeting production of 556 million tonnes by the final year of the plan. Analysts expect CIL’s volume growth to remain muted in the wake of stricter government regulation of mining companies. The company has a good business model and is expected to benefit from its monopolist position in coal production. Due to the tough regulatory environment, it may witness muted volume growth in the near- to medium-term, but in the long run it is expected to perform well. But wait for valuations to correct before you invest in this stock.

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