Monday, July 4, 2011

Coal India Set to Overtake Reliance, Just 14% Behind in Market Cap

Will Coal India Ltd (BSE: 533278, NSE: COALINDIA) soon edge out Reliance Industries Ltd (BSE: 500325, NSE: RELIANCE) to become India’s most valuable company? If that happens that would be something to cheer for the whole nation, as here is a PSU, and a very equitable one at that - it is the largest employer - edging out the biggest of private enterprises.

Coal India is all set to be included in the prestigious BSE Sensex index from August 8th onwards, a move that will help not only help Coal India scrip in this flight to top, but the Sensex EPS itself. 

The decent Q4 & FY’11 results, as well as recent intentions to boost production growth rate from 6% to 9%, has made even the most respected international brokerages call for a re-rating of the scrip. The demand environment also continues to be strong, with NTPC alone placing a 10 MT order, and 18 of the who-is-who of world coal like Rio Tinto, Peabody, Massey, Xstrata, Sinarmas lining up to serve Coal India with whatever coal it can’t produce on its own in time.

And to move Coal more efficiently, Coal India has even offered Indian Railways a deal to buy many new rakes.

For a recent entrant into India’s capital markets, Coal India has really gone places. The first flight was, of course, unknown to many. It was during an almost decade-long run-up to its IPO, when Coal India Ltd and its wholly owned subsidiaries effected a magical turnaround in business.

The second flight was the most famous, when CIL did what was the world’s third largest IPO in recent history, and witnessed huge oversubscription as well as handsome listing gains.

But soon came a period of lull, when the markets considered that the Coal India scrip was fully priced between Rs. 300 to Rs. 350. This period also witnessed fundamental challenges for the company from a few fronts including environment and transportation, as well as a scheduled leadership change at the top.

But by mid-March, CIL had sorted out most of these problems under the new Chairman, NC Jha, who was formerly Technical Director and, of course, a company veteran. And the third flight began for the company and the scrip, which saw this most-recent Maharatna achiever quickly surpass IT major TCS and petroleum major ONGC, to become India’s second most valuable company and most valuable PSU, by market capitalization.

Now, the only company remaining ahead, Reliance Industries, seems so near with not more than Rs. 35,000 crore separating their respective market caps. Percentage wise it looks very small at just 14%. The consensus target for Coal India by a few international brokerages has higher upside than this, percentage-wise. 

This looks all the more achievable as Reliance has been reeling recently at the bourses, due to multiple inquiries it is facing with India's regulators. But it remains to be seen whether Reliance will give up the most-valuable status without a fight. In any case it seems that Reliance also would have reason to smile as Reliance and/or Chairman Mukesh Ambani had invested the maximum possible in Coal India during its IPO.  

With the FY’11 results out, Coal India seems very much poised for the next and possibly final take-off to become India’s most valuable enterprise. Consolidated net profit for the fiscal is up by almost 13%, on a revenue growth of over 11%. Not a bad jump at all, considering the huge base on which it has come.

Coal India is also boldly addressing several challenges to its momentum posed by policy hurdles, railway logistics, and environment concerns. With the full backing of India's Coal Minister Sriprakash Jaiswal, Coal India seems to have surmounted the challenge posed by a Planning Commission directive that would have restricted the e-auction arrangement that is not only a boon to power projects with no explicit coal-linkages, but an 80% more profitable arrangement for Coal India, than the usual Fuel Supply Agreements (FSA) under which it sells at hugely subsidised prices.

CIL has also taken up the logistics issue head-on with Indian Railways, by working together as well as fighting for its rights when needed, with good results coming in.

By focusing on green initiatives as well as publicizing them, CIL has also largely addressed the environmental concerns.

But what will really make Coal India fly for the long haul this time is the sheer demand for their product, as well as the enormous room remaining to extract better prices vis-à-vis high international rates. Already, it is estimated that out of the 80,000 MW power generation target for 2017, barely 40,000 MW worth of projects have succeeded in obtaining coal-linkages.

This booming demand and scope for better prices have successfully neutralized a recent enormous jump in wage bill, and are expected to make Coal India a scrip of long-term investment potential.

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