Coal India eyes m-cap glory, takes a shot at Reliance

Coal India is on the verge of toppling Reliance Industries as India’s most valuable company by market capitalisation. However, don’t write off Reliance just yet, because the stock might be undervalued at current levels and could stage a comeback, according to some experts.

On Tuesday, India’s largest and only producer of coal, which listed on the stock exchanges in November last year, clocked Rs 2.44 lakh crore in market capitalisation while Reliance Industries logged in Rs 2.49 lakh crore.

[caption id=“attachment_61826” align=“alignleft” width=“380” caption=“some experts believe that Coal India’s shares might be reaching the upper limit of its price gains. Reuters”]  [/caption]

Market capitalisation is calculated by multiplying the current share price by the number of shares issued by the company. The market capitalisation of a company typically tells investors how much the company is worth.

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On Monday, Coal India was trading at Rs 390, up 10 percent from the price it closed at on November 4, the day it listed. On Monday, the stock was trading at Rs 390, having added Rs Rs 21 thousand crore to its market capitalisation.

Meanwhile, shares of Reliance Industries, which has been India’s top company by market capitalisation for close to a decade, nosedived to Rs 767 a share from Rs 1,106 a share, slicing a little more than Rs 1 lakh crore off its market capitalisation.

So, it seems like a matter of time - perhaps days or even hours - before Coal India knocks Reliance from its perch.

How do the two companies fare on valuations?

Coal India’s shares are currently trading at a forward price-to-earnings ratio of 17 (based on estimated earnings per share of Rs 22 for the year ending March 2012). The P/E ratio is a measure of the price paid for a company’s share’s relative to its earnings. In this case, an investor, theoretically, pays Rs 17 for every one rupee of Coal India’s earnings. In general, higher the P/E ratio, the more expensive the share is relative to its earnings.

[caption id=“attachment_61968” align=“alignright” width=“380” caption=“Coal India share price chart. Source Capitaline.”]  [/caption]

At the moment, some experts believe that Coal India’s shares might be reaching the upper limit of its price gains. UBS Investment Research, for instance, has a price target of Rs 400, but maintains a “neutral” rating. No doubt, the company, which boasts of the largest coal reserves in the world, has a lot of things for it: profit in the June-ending quarter jumped 64 percent, and demand for coal is rising faster than company’s the annual production. The company is also one of the lowest-cost producers of coal. Coal is primarily used as fuel by power, steel and fertiliser companies. Coal accounted for 54 percent of total power capacity at the end of April 2011 and 66 percent of total electricity generated in FY11.

Reliance’s forward P/E ratio, meanwhile, is down to a more palatable 11, based on estimated earnings of Rs 70 per share for the year ending March 2012. In the past, the stock’s P/E ratio has ranged between 10 and 19.

[caption id=“attachment_61973” align=“alignleft” width=“380” caption=“Reliance share price chart. Capitaline.”]  [/caption]

As The Economist magazine points out, the stock looks relatively undervalued. “Reliance has no net debt to speak of and enviably high market shares in petrochemicals. Of Reliance’s main business lines, refining is chugging along, and the firm is investing to double the size of its petrochemicals unit. Add to it Reliance’s nascent shale-gas projects in America, and gross operating profit from these activities could double to $11 billion in 3-4 years.”

True, technical glitches in its gas and oilfields, mainly off India’s east coast in its flagship KG-D6 block, have seen production fall, dashing hopes for bumper profits in the short term, Somshankar Sinha of CLSA told The Economist.

But despite all its woes, the stock has its believers. Standard Chartered Equity Research, for instance, maintains an “outperformer” rating on the stock, with a price target of Rs 969.

So, perhaps Reliance still has some fight left. While it is almost certain that the stock will lose ground to Coal India soon, don’t expect the company to give up its top stop without a fight.