* Earmarks $1.2 billion for foreign acquisitions in FY11
* Eyeing "couple of proposals" to buy stake in coal firms
* 225-245 rupees/shr range vs Reuters poll at 250 rupees/shr
* Analysts say Coal India deserves premium over global rivals
* Focus on profit margin growth - chairman (Updates with more quotes, analyst comments)
By Prashant Mehra and Ketan Bondre
MUMBAI, Oct 13 (Reuters) - Coal India, which plans to raise up to $3.5 billion in country's biggest IPO, said it expects profits to rise by a quarter this fiscal year, fuelled by growing demand for power in Asia's third-largest economy.
The world's largest coal miner has set aside $1.2 billion for overseas acquisitions in the year to March 2011 and is evaluating a "couple of proposals" for buying stakes in overseas coal firms, Chairman Partha Bhattacharyya told reporters on Wednesday.
The Indian government on Tuesday set a lower-than-expected price band of 225 to 245 rupees a share for the state-owned company's initial public offering, which opens next week.
A Reuters poll of fund managers had expected the IPO to be priced around 250 Indian rupees a share, with most of those surveyed keen to invest given the Indian miner's dominant market position and attractive valuations.
"Until now, there has been no direct play on this theme in the Indian equity market," brokerage IIFL said in a research note. "(Coal India) is in a sweet spot -- its growth is limited by production, not demand," it said.
Coal powers 75 percent of India's electricity output and demand is expected to grow 11 percent a year. India faces a peak-hour power deficit of nearly 14 percent and plans to triple its generation capacity over the next decade.
DEMAND OUTSTRIPS PRODUCTION
If priced at the top end of the band, the company would be valued at $35 billion, placing it among the top ten Indian firms by market value. Brokerages valued the company at up to $45 billion after the price band announcement, indicating a 30-percent premium.
"Coal demand (in India) is likely to grow at faster than production. There is a 2.5 percent difference in demand and supply locally and we are seeing 20 percent annual growth in imports," Coal India's Bhattacharyya said.
Coal India expects an increase of 14.5 percent in revenue and 33 to 35 percent growth in earnings before interest, tax, depreciation and amortisation margins in fiscal 2011, said A.K. Sinha, director of finance at Coal India. Coal India, founded in 1973 when the government nationalised many coal mines, made a net profit of 98.3 billion rupees ($2.2 billion) in 2010 fiscal year on revenue of 525.9 billion rupees.
The net profit should grow by 25 percent in the year to March, the company said. It will focus on expanding margins by selling more high quality, higher priced washed coal.
"We will go for washing of coal in a big way. Margin growth will be dominant focus," Bhattacharyya said.
The IPO is part of India's broader effort to divest stakes in roughly 60 state-run companies in the next few years.
A banker with direct knowledge of the deal said the retail portion might not meet as much demand as the institutional portion, with a spate of IPOs in recent weeks competing for investors' cash.
SWEET SPOT
IIFL said Coal India deserves a premium over its global peers due to the Indian firm's lower earnings volatility, a large undeveloped resource base and potential to increase prices.
The brokerage valued Coal India between 300 rupees and 345 rupees per share, implying an upside of 22 to 41 percent to the upper end of the price band.
The company reported earnings per share of 15.60 rupees for the fiscal year ended March 2010 and would be valued at 15.7 times trailing earnings if priced at the top end of the 225-245 rupees a share price band.
China's Shenhua Energy, the Indian miner's closest rival, trades at 16 times earnings, while smaller Indonesian peer Adaro Energy has a ratio of 20 times. U.S. miner Peabody Energy trades at 25 times earnings.
Coal India, based in the eastern city of Kolkata, produced 431 million tonnes in 2009/10, accounting for nearly 80 percent of Indian coal output.
Citigroup, Morgan Stanley, Deutsche Bank Kotak Mahindra Capital, Enam Securities, and Bank of America-Merrill Lynch are managers to the Coal India offer. ($1=44.5 rupees) (Writing by Sumeet Chatterjee; Editing by Jui Chakravorty and Lincoln Feast)