Coal India Ltd - Initiation - Centrum 17042012.pdf - all-mail-archive

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INDIA

Mining

Coal India Ltd.

Buy

Target Price: Rs395

CMP: Rs339*

Upside: 16.5%

*as on16th April 2012

Abhisar Jain

abhisar.jain@centrum.co.in

+91 22 4215 9928

Initiation 17 April 2012

More coal is the goal as FSA clarity

emerges…

We expect Coal India Ltd (CIL) to turn the tide of flat production

growth during past three years and achieve higher coal production

and sales with a CAGR of 5% and 5.6% respectively during FY12-

15E. We believe that the market at present is not willing to factor in

CIL’s ability to increase production as well as prices and seems to

have remained overly concerned over issues related to FSA signing

and reduction in e-auction coal volumes. We expect this perception

to change going forward and expect net sales and EBITDA CAGR of

8.8% and 13.6% during FY12-15E. Valuations appear attractive to

us with a huge cash balance (~25% of market cap). We initiate BUY

with a target price of Rs395.

Production at an inflection point, we expect smart up move

from here: After flat production growth during FY10-12, we

believe the production is at an inflection point and expect

production CAGR of 4.6% during FY12-17E. We expect higher

production on the back of i) increased capacity utilization at

several coalfields and faster approvals for new projects as well as

capacity expansions at existing mines. We see FY13E/14E coal

production of 458/481 MT respectively.

FSA signing - a blessing in disguise and would lead to higher

dispatches: We see the forced FSA signing (as enforced through

Presidential directive) as a blessing in disguise for CIL. We believe

that market perception and concerns on FSAs have been

overdone for long. In our view FSA signing would give the

necessary push to CIL to produce and sell more. Also, with the

penalty clause becoming practically non-existent after CIL’s

board meeting on April 16, 2012, we see the present FSA

situation as a win-win for CIL. We expect CIL sales volume to

reach ~546 MT by FY17E (CAGR of 4.7%). We see ~7% sales

growth in FY13E to 463 MT supported by better railway logistics.

We expect e-auction sales to remain constant at ~48.5 MT over

the next three years.

Shift to GCV based pricing positive, price increase matters

the most now: We see the shift to GCV based pricing as a

positive and expect 4% price increase each in FY13E & FY14E

from Coal India on the new GCV based price list.

Low cost open cast operations remain key strength: Low cost

and open cast (90% of overall mining) operations continue to

remain the key strength and earnings driver for the company.

Wages have been hiked by ~25% and we expect stable employee

cost/tonne from FY13E onwards as the number of employees

drop and production increases.

Valuations – attractive, initiate with a Buy: We see CIL stock

trading at attractive valuations with FY14E adj. EV/EBITDA of 5.6x and

FY14E adj. P/E of 10.4x. With increasing comfort on higher volumes

going forward and expected price increase, we value the stock at 7x

FY14E adj. EV/EBITDA (~15% premium to global peers) to arrive at a

fair value of Rs395 for the stock. Our DCF valuation fair value stands

at Rs363. We initiate buy with a target price of Rs395.

Key Risks: Flat to negative production growth, lower sales volumes

due to logistics constraints, lower e-auction volumes for meeting FSA

quantities and price increase not allowed by the government.

Key Data

Bloomberg Code

COAL IN

Reuters Code

COAL.BO

Current Shares O/S (mn) 6,316.4

Diluted Shares O/S (mn) 6,316.4

Mkt Cap (Rsbn/USDbn) 2,140.6/41.6

52 Wk H / L (Rs) 422/294

Daily Vol. (3M NSE Avg.) 3,794,661

Face Value (Rs) 10

USD = Rs51.5

Shareholding Pattern (%)

Promoter

(GoI)

90%

As on 31 March 2012

FIIs

5%

DIIs

2%

Public &

others

3%

One Year Indexed Stock Performance

120

110

100

90

80

70

Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12

COAL INDIA LTD

Price Performance (%)*

BSE SENSEX 30 INDEX

1M 6M 1Yr

COAL (1.3) 2.1 (4.2)

NIFTY (4.1) 2.6 (11.9)

as on 16th April 2012

Source: Bloomberg, Centrum Research

Y/E March

(Rsmn) Revenue YoY (%)

Adj.

EBITDA*

Adj.

EBITDA (%)

Adj.

PAT* YoY (%) RoE (%) RoCE (%)

Please refer to important disclosures/disclaimers in Appendix A

Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet

Adj.

EPS*

Adj.

PE (x)

PB (x)

Adj.

EV/EBITDA (x)

FY11 526,162 12.7 166,754 31.7 125,958 10.6 28.2 30.9 19.9 17.0 5.6 9.7

FY12E 622,719 18.4 190,076 30.5 157,924 29.8 30.8 30.9 25.0 13.6 4.7 8.1

FY13E 681,664 9.5 223,534 32.8 186,041 19.0 30.8 31.3 29.5 11.5 3.9 6.6

FY14E 738,588 8.4 248,497 33.6 207,123 12.0 29.2 29.9 32.8 10.3 3.3 5.6

FY15E 802,639 8.7 278,725 34.7 233,771 13.6 27.9 28.6 37.0 9.2 2.8 4.6

* EBITDA, PAT and EPS are adjusted for overburden removal expenses

Source: Company, Centrum Research Estimates


Shareholding pattern (%)

Q4FY12 Q3FY12 Q2FY12 Q1FY12

Promoter (GoI) 90.0 90.0 90.0 90.0

FIIs 5.4 5.6 6.3 6.4

DIIs 1.8 1.8 1.6 1.6

Public & others 2.8 2.6 2.1 2.0

Total 100.0 100.0 100.0 100.0

Source: BSE

Company Background

CIL is World’s largest producer of coal and has extractable

reserves and resources of 21.7 bn tonnes of coal. It accounts for

~82% of India’s coal production and supplies ~80% of its coal

output to power plants in India. CIL’s coal production is carried

out through seven wholly-owned subsidiaries in India which are

spread across the country. CIL operates 471 mines and features

among the lowest cost producers of coal in the world on the

back of open cast mining operations.

Coal India Sales Volume

600

550

500

450

400

350

300

7.0

4.9 4.9

4.0

3.0

1.9

425 432 463 486 510 525 546

FY11 FY12E FY13E FY14E FY15E FY16E FY17E

8

7

6

5

4

3

2

1

0

Sales (MT)

YoY % Growth

Source: Company, Centrum Research Estimates

Key management personnel

Name Position Profile

Ms. Zohra Chatterji Chairman-cum-

Managing Director

Ms. Zohra Chatterji has assumed the charge of Chairman-cum-Managing Director of Coal

India Limited from 01.02.2012. She is an officer of the 1979 batch of the IAS belonging to

Uttar Pradesh cadre. She has held various important assignments in U.P and has been

associated with the industries sector in UP for nearly 10 years and has held posts including

MD of the UP Small Industries Corporation and UP Handlooms. She has also served as

Secretary and Director General, Tourism & Secretary and Director Industries & Labour

Commissioner. She is a graduate in Physics (Hons.) and Post-graduate in English Literature.

Mr. Asok Kumar Sinha Director (Finance) Mr. A.K Sinha is the Director (Finance) of the company. He graduated with honours in physics

from Calcutta university in 1971 and became a member of the Institute of Chartered

Accountants of India in 1976. He has over three decades of experience as a finance executive

in the mining industry. He was associated with CIL subsidiary ECL from 1977 to 2001 in

various capacities.

Mr. R Mohan Das

Director (Personnel &

Industrial relations)

Mr. R. Mohan Das, aged 53 years, is the Director (Personnel & Industrial Relations) of our

Company. Holding a post graduate degree in social work from Madurai University, Mr. Das

began his professional career over three decades ago with Bharat Heavy Electricals Limited

in their human resources department.As Director (Personnel & Industrial Relations) of CIL,

Mr. Das is responsible for the formulation and implementation of personnel policies of the

Company

2

Coal India Ltd.


Investment Rationale

Production at an inflection point: After flat production growth during

FY10-12, we believe production is at an inflection point and expect

production CAGR of 4.6% during FY12-17E.

FSA signing to be a blessing in disguise: We see the forced FSA signing

(as enforced through Presidential directive) as a blessing in disguise for

CIL. We believe that market perception and concerns on FSAs are

overdone. In our view FSA signing would give the necessary push to CIL

to produce and sell more and import coal to meet the shortfall. We

expect CIL sales volume to reach ~546 MT by FY17E (CAGR of 4.7%).

Shift to GCV based pricing a positive: We see shift to GCV based pricing

as a positive and expect 4% price increase each in FY13E & FY14E from

Coal India on the new GCV based price list

Low cost open cast operations remain core strength: Low cost and

open cast (90% of overall mining) operations continue to remain the key

strength and earnings driver for the company

Valuation – attractive, Buy

(Rsbn)

FY14E

FY14E adj. EBITDA 248.5

Exp EV/EBITDA Multiple (x) 7.0

Expected EV 1,739.5

Add Cash+Investments 768.9

Less Debt 12.5

Mkt Cap Expected 2,495.9

Fair Value 2,495.9

No. of Shares (bn) 6.3

Fair Value (Rs) 395.1

Source: Centrum Research Estimates

Summary Financial

Y/E March (Rsmn) FY11 FY12E FY13E FY14E FY15E

Key Income Statement

Revenue 526,162 622,719 681,664 738,588 802,639

YoY growth (%) 12.7 18.4 9.5 8.4 8.7

Adj. EBITDA* 166,754 190,076 223,534 248,497 278,725

YoY growth (%) 30.8 16.8 19.3 12.0 13.1

EBITDA margin 31.7 30.5 32.8 33.6 34.7

Depreciation 16,729 18,324 20,574 22,824 25,074

Interest expenses 791 1,421 1,321 1,221 1,121

Other non operating income 47,963 58,000 68,000 76,000 87,000

PBT 164,632 198,383 237,880 267,321 304,957

Provision for tax 55,959 69,479 82,714 92,640 105,281

Adj. PAT* 125,958 157,924 186,041 207,123 233,771

YoY growth (%) 10.6 29.8 19.0 12.0 13.6

PAT margin 23.9 25.4 27.3 28.0 29.1

Key Cash Flow Statement Data

Cash generated from operations 135,784 217,780 209,074 238,161 266,411

Cash flow from investing activities (15,647) (50,000) (55,000) (60,000) (60,000)

Cash flow from financing activities (39,624) (76,627) (87,613) (98,598) (98,498)

Net cash increase/decrease 80,512 91,153 66,462 79,563 107,913

Key Balance Sheet Data

Shareholders' fund 385,015 457,494 545,920 643,592 767,126

Debt 15,536 14,536 13,536 12,536 11,536

Deferred Tax Liability (8,732) (8,732) (8,732) (8,732) (8,732)

Total Capital Employed 400,876 472,355 559,782 656,454 778,988

Fixed Assets 101,585 123,261 152,686 179,862 204,787

CWIP 20,869 30,869 35,869 45,869 55,869

Investments 10,637 10,637 10,637 10,637 10,637

Net current assets 257,708 297,512 350,513 410,009 497,618

Total Assets 400,876 472,355 559,782 656,454 778,988

Key Ratio

ROE 28.2 30.8 30.8 29.2 27.9

ROCE 30.9 30.9 31.3 29.9 28.6

Per share Ratios (Rs)

Fully diluted adj. EPS* 19.9 25.0 29.5 32.8 37.0

Book value 61.0 72.4 86.4 101.9 121.5

Solvency Ratio (x)

Interest coverage ratio 156.7 102.6 132.6 161.0 199.0

Valuation parameters(x)

P/E (Adj. Fully Diluted) 17.0 13.6 11.5 10.3 9.2

P/BV 5.6 4.7 3.9 3.3 2.8

EV/EBITDA (adj) 9.7 8.1 6.6 5.6 4.6

EV/Sales 3.1 2.5 2.1 1.9 1.6

EBITDA, PAT and EPS are adjusted for overburden removal expenses

Source: Company, Centrum Research Estimates

3

Coal India Ltd.


Investment Rationale

Production at an inflection point, could move higher smartly and

surprise the markets positively

Production growth has remained dismal in recent years….

CIL’s production growth has remained dismal in the past few years with stagnant growth rates and

annual production run rate of ~430-435 MT during the last three fiscals but we believe that

production is at an inflection point and would move higher from here on and surprise the markets

on the upside. Production has fallen well short of company’s guidance and has been plagued by

multiple issues namely i) lower production due to high rainfall, ii) operational bottlenecks in

increasing production and capacity utilization from several mines with low capex outlay, iii) slow

progress in ramp up on completed projects for increasing production from existing mines and iv)

delay on land acquisition and clearances from the various regulatory bodies on projects which are

approved and involve increase in capacity through either Brownfield or Greenfield route.

Exhibit 1: Production growth has slackened during FY10-12

500

450

400

350

300

250

200

150

100

50

0

431 431 436

404

361

379

6.4

6.8

5.1

1.1

0.0

FY07 FY08 FY09 FY10 FY11 FY12

Production (MT)

YoY % Growth

10

8

6

4

2

0

-2

Source: Company, Centrum Research Estimates

Slow clearances and delays in execution of projects have kept production

and capacity utilization at bay ….

CIL has faced production and mining delays at almost all levels starting from land acquisition,

forest clearances, environment clearances and eventual start & ramp up of mining on its projects in

the recent years which were aimed at increasing production. We note that 32 projects to expand

existing mine capacity by 104 mtpa were implemented by FY10 at a capex of Rs48.5bn but these

could contribute only ~60 MT in production in the following two years (at a capacity utilization of

less than 60%). Similarly 25 other projects to increase production of existing mines by ~48 MT are

in progress and set to be completed by end of FY12 (we believe delay is inevitable). 20 projects

involving starting of new mines as part of the capacity augmentation plan and aimed at increasing

capacity by ~33 MT are scheduled to be commissioned during the 12 th plan.

Exhibit 2: Expansion projects of CIL

No. of

Projects

32

25

20

Total = 77

Type of Projects

Expansion of

existing mines

Expansion of

existing mines

Expansion of new

mines

Source: Company ppts, Centrum Research

Implementation

status

Capacity addition

targeted (MT)

Capex (Rs Mn)

Target

Completion Date

Production

(FY10) (MT)

Production to be

achieved

(FY13-17E)

Implemented 104 48,555 FY10 57 47

Under

Implementation

Under

Implementation

Under

Implementation

48 33,857 FY12 NA 48

33 25,763 FY13-18 NA 33

185 By FY18 57 128

4

Coal India Ltd.


But pipeline of projects still remain strong and recent project approvals give

indication of a change in tide

We note that CIL has the ability to increase production by a total of ~128 MT from existing projects

before the end of FY17E which implies an annual production growth of 25MT till FY17E. The

pipeline of new projects also remains strong. CIL recently approved 12 mtpa Amrapali project to

further augment its production. CIL also obtained 10 approvals recently (in Q4FY12E) for increasing

production by ~19MT at existing projects as there is pressure from PMO and coal ministry for

increasing production for CIL and environment and forest ministries are being pushed to fast track

approvals. We see that only 25% of new production is expected to come from new mines and the

rest is from existing mines, where approvals can be quick and work could be fast tracked. This is a

positive that gives confidence on production growth. Though the progress in recent years by CIL in

increasing capacity utilization at existing mines has been largely tepid we believe the inflection

point has now been reached and production would move higher from FY13E onwards.

Exhibit 3: Status of projects during XI plan

Number Capacity (MT) Production (MT)

Total Projects Identified 145 391.9

Approved till date 80 195.8

Implemented by FY11 37 80.1

To be Implemented by FY12 42 88.7

Balance yet to be approved 65 196.1

Source: Company annual report, Centrum Research

Exhibit 4: Status of projects already taken up

Total projects 117

Projects on schedule 76

Delayed 41

-- due to geomining cond 2

-- due to land acqustn 24

-- due to miscellaneous 15

Exhibit 5: Total Planned projects break-up – Subsidiary wise

Projects

Capacity (MT)

MCL 20 127

SECL 35 99

CCL 24 61

NCL 6 53

WCL 32 30

ECL 18 17

BCCL 6 3

NEC 4 1

Total CIL 145 391

Source: Company ppts, Centrum Research

5

Coal India Ltd.


We see ~22mtpa of possible production increase through increased capacity

utilization at 5 coalfields alone

We note that CIL is currently operating at below 90% capacity utilization at several of its coal fields

and we believe that 5 of these fields have scope for increasing capacity utilization and thus

production. These fields are Singrauli, Talcher, Jharia, Central India coalfields and Raniganj. In

comparison to other large fields which are operating at ~100% capacity utilization, we conclude

that these 5 fields can contribute an additional 31 MT of production (~7% of current annual

production). But due to various bottlenecks hampering production increase we believe that this

would be challenging. However, we believe that fields with largely open cast operations (Talcher,

Singhrauli and Central India coalfields) could help increase production by ~22MT annually in the

next few years.

Exhibit 6: Capacity utilization by mines and scope for increase

Coal Fields

Capacity

(MT)

Production (FY10)

(MT)

Capacity Utlztn

(%)

Possible increase

(MT)

Korba 75 78 104.6

Singrauli 77 68 87.9 9

Talcher 69 60 86.6 9

IB Valley 45 44 98.5

Wardha Valley 29 29 101.1

Jharia 33 27 83.2 5

North Karanpura 24 24 98.2

Central India coalfields 29 25 85.2 4

Raniganj 21 17 81.0 4

Rajmahal/Deogarh 11 13 119.1

East Bokaro 10 13 127.0

West Bokaro 7 5 73.7

Kamptee 5 5 100.6

Mand Raigarh 5 5 96.6

Umrer nand bander 4 4 106.8

South Karanpura 5 4 79.6

Pench-Kanhan 5 4 77.2

Pathakhera 4 3 81.5

Makum 1 1 111.0

Ramgarh 1 1 110.0

Giridh 1 1 58.0

Total 462 431 93.3 31

Source: Company, Centrum Research

Exhibit 7: Possible production increase in specific fields

Coalfield

Types of Mines

Operating

subsidiary UG OC M T

Capacity

(MT)

Production

(MT

Possible

Increase (MT)

Our estimated

increase (MT)

Singrauli NCL 10 10 77 68 9 9

Talcher MCL 4 9 13 69 58 9 6

Jharia BCCL 38 17 23 78 33 27 6 3

Central India Coalfields SECL 56 15 1 72 29 25 4 2

Raniganj ECL/BCCL 84 16 7 107 21 17 4 2

Total 182 67 31 280 229 195 32 22

Source: Company ppts, Centrum Research

6

Coal India Ltd.


Progressive increase from expansions and higher capacity utilization to lift

production to ~546 MT by FY17E (4.6% CAGR)

We see CIL production to be at an inflection point and with pick up in project approvals expect

production to reach ~546 MT by FY17E (CAGR of 4.6%), as against management expectation of 556

MT. We see ~5% production growth in FY13E/14E/15E as capacity utilization at existing coalfields

increase and recently concluded expansions augment production. We remain conservative on our

production growth estimates after FY15E as we note that various bottlenecks at existing coal fields

would limit growth and adding more than 25 MT of production every year could be an operational

challenge for the company.

Exhibit 8: Production to reach 546 MT by FY17E

600

550

500

450

400

350

300

546

525

505

481

458

431 436

5.0 5.0 5.0

4.0 4.0

1.1

FY11 FY12E FY13E FY14E FY15E FY16E FY17E

Production (MT) YoY % Growth

9

8

7

6

5

4

3

2

1

0

Source: Company, Centrum Research

7

Coal India Ltd.


Setting up of coal washeries is positive but progress is slow

We see coal beneficiation benefits for CIL to accrue only from FY15E as the progress on setting up

these facilities remains slow. CIL has undertaken projects to develop 20 new coal beneficiation

facilities with an additional capacity of 111 MT to increase the production of beneficiated coal

(which has higher realizations and margins). In addition the company intends to equip all new

open cast mines with dedicated coal beneficiation capacities to produce consistent and better

quality coal. The company targets to produce ~300 MT of washed coal in the long term but we

note that the progress on setting up of coal beneficiation facilities is slow and only 3 out of 20 have

obtained environmental clearances till now while the others still remain in approval stages. We

expect the beneficiated coal sales to reach ~30.6 MT in FY15E and ~49 MT by FY17E, resulting in

increase in share of beneficiated coal in the total coal mix to ~9% in FY17E and ~6% in FY15E from ~4% in FY12.

Exhibit 9: Beneficiated coal to account for ~6% of overall production by FY15E

60.0

50.0

40.0

30.0

20.0

10.0

0.0

3.7

3.4 3.6 3.5 3.5

14.9 14.6 15.5 15.1 16.2

4.0

19.4

6.1

30.6

8.0

42.0

9.0

49.1

FY09 FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E

Benefeciated Coal (MT) % share

Source: Company, Centrum Research

Beneficiated coal garners higher realizations (~Rs 2100/tonne in FY12E and ~US$44/tonne on an

average) and thus results in higher EBITDA/tonne for the company. Based on feedback from the

company and our analysis, we observe that in comparison to the current EBITDA of only

~US$10/tonne on selling raw coal, the company makes a much higher EBITDA of ~US$24/tonne by

selling beneficiated coal in the domestic market. With a renewed focus on achieving higher sales

and profits through a smart increase in production of washed coal going forward, we expect CIL to

make a quantum jump in earnings gradually from FY15E onwards once the beneficiation facilities

start coming on-stream and proportion of washed coal in the overall mix goes up.

Exhibit 10: Beneficiated coal garners higher realizations and EBITDA

(US$/tonne) Raw Coal Beneficiated Coal

COP 14 20

Realization 24 44

EBITDA 10 24

Source: Company, Centrum Research

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

8

Coal India Ltd.


FSA signing push - a blessing in disguise, market concerns

overdone

New FSA to be signed soon and additional quantities shipped from FY13E

(FSA efficacy diluted with effectively nil penalties)

We see the forced FSA signing (as enforced through Presidential directive) as a blessing in disguise

for CIL. We believe that market perception and concerns on FSAs are overdone. In our view FSA

signing would give the necessary push to CIL to produce and sell more and CIL can also enter into

import contracts with global players for supplying the coal at cost plus basis with no subsidy from

its end (this has been clearly indicated by CIL management). Also, the penalty clause for not

supplying the required quantities has been fixed at a mere 0.01% of the value of shortfall after

three years and zero for the first three years.. Also in all probability we see CIL resorting to imports

without it bearing any additional cost or subsidizing imports for customers as well as keep

penalties at a lower level for protecting itself in the event of a shortfall. This would create a win-win

situation for CIL and would also keep the incentive of producing more and meeting as much of the

requirement of FSAs as possible.

Coal India (CIL) has been asked to sign FSAs with power plants (that have been issued the LoAs by

CIL and its subsidiaries already) that have entered into long-term PPAs. For plants set up by 31 Dec

2011, PMO had directed the signing of FSAs before 31 Mar 2012 but with CIL failing to comply with

the same, the GoI issued presidential directive to CIL. CIL will have to ensure a minimum supply

level of 80% in the FSAs to avoid penalties. In case of any shortfall, CIL will arrange for imports or

buy from State/Central PSUs who have been allotted coal blocks.

The FSA and LoA based coal supply obligation on CIL is as follows:

Power utilities already linked to CIL and commissioned as on 31 March 2009 account for the

annual supply of ~306 MT with required minimum supply level of 90%

CIL has reported that as on 25 th January 2012, 172 LoAs accounting for ~109GW of capacity

and requiring ~424 MT of coal have been issued.

Out of 109GW of capacity, 19800 MW from 50 power plants has been commissioned since

Mar’09 upto Dec’11 and the proportionate coal requirement of the same stands at ~83 MT.

Additional 8450 MW was expected to be commissioned by Mar’12 and is likely to require

further ~36 MT of coal resulting in a total coal requirement of ~119 MT for new power plants.

CIL is expected to sign the FSA’s with 19800 MW of capacity already commissioned by Dec’11

but we have assumed FSA signing for ~28000 MW for our calculations.

Remaining capacity of ~82.5GW is expected to be commissioned during the 12 th plan period

(by FY17E) and would require ~305 MT of coal

Exhibit 11: New FSA related coal quantity obligation for CIL

Description

Power

Capacity

(MW)

Coal Qty

Required

(MT)

FY13E

Minimum qty to

be supplied (MT)

Total LoAs Issued-172 109,000 424

Capacity commissioned

by Dec'11 19,800 83 66

Capacity slated to

commission between

Jan'12-Mar'12 8,450 36 29

Remaining capacity for

FY13E-17E 80,750 305 Nil

Source: Company annual report, Centrum Research

Exhibit 12: Existing supply mix of CIL

(In MT)

Linkage

Actual

Supply Supply (%)

FSA - With Power Utilities 306 284 93

Committed to non-power sector 102 65 64

E-auction 48 48

Washed Coal Sales 15 15

Other new power utilities - LOA basis 20

Total 432

9

Coal India Ltd.


The new FSA coal requirement which we foresee for CIL in FY13E and going forward is:

On signing of FSA for ~28000 MW of power capacity (supposedly commissioned by FY12E end

and having PPAs in place), CIL would be required to supply ~95MT (80% minimum of ~119MT

ACQ) additional FSA coal in FY13E. If CIL signs with power plants commissioned till Dec’11 with

a power capacity of 19800 MW, it would be required to supply ~66 MT (80% minimum of ~83

MT ACQ). We have assumed FSA signing for ~28000 MW for our calculations.

Assuming that going forward around 12000 MW of power capacity would be commissioned in

each year from FY13E to FY17E, we foresee an additional 40 MT of FSA requirement by the

power utilities from CIL.

The supply scenario for CIL going forward as we see it is:

We see 22 MT of production growth in FY13E on the back of i) higher capacity utilization at

various coalfields where capacity had increased during the last few years and ii) new projects

coming on-stream.

We note that ~12 MT additional quantity is currently supplied above the required 90% level on

the existing FSAs and can be diverted for the new FSAs depending on logistics. Also several

commissioned power plants with LoAs are currently getting ~40% linkage amounting to a

total supply of ~25 MT. Also, we estimate that at least 5 MT of inventory sales annually can be

done to provide coal to power plants with new FSAs going forward

Based on our estimates, CIL could ideally be able to supply ~64 MT (22+12+25+5 as explained

above) of additional new FSA related requirement in FY13E. Still, it would fall short by 31 MT

(based on our estimates as of now on 28000 MW FSA signing though we expect the eventual

signing to be lower than 28000 MW). We conclude that CIL has to import this quantity of coal

through long term contracts with global suppliers on behalf of consumers and supply the

same to them at cost plus basis without any subsidy. Further clarity on imports is still to

emerge from the CIL management and we expect a clear picture after the next few board

meetings. But with the penalty clause getting diluted, we expect CIL to not face any financial

burden in case of a shortfall. Also, if CIL signs FSA with only 19800 MW of power plants we

don’t foresee any shortage and need of imports in FY13E but imports would be required going

forward from FY14E. We await details on FSA signing which would emerge before the end of

April’11 to make our final assumptions for imports required and shortfall if any at our assumed

production and sales levels.

Exhibit 13: Imports would be required to meet 80% FSA requirement going forward

(In MT) FY12E FY13E FY14E FY15E FY16E FY17E

Power Capacity Commissioned before end of fiscal

year (MW) 28,250 12,000 12,000 12,000 12,000 12,000

Coal qty required at 100% requirement 119 50 50 50 50 50

80% trigger level FSA quantity to be supplied from

next fiscal 95.2 40 40 40 40 40

Additional FSA related coal supply required from CIL NA 95.2 40 40 40 40

Source of additional supply

Already supplied based on LOAs 25 0 0 0 0

Additional production during the fiscal 22 23 24 20 21

Possible freeing up of additional quantities supplied

above 90% for existing FSA's with 90% trigger level 12

Inventory sales 5 5 5 0 0

Imports 31 12 11 20 19

Imports - Cumulative 31 43 54 74 93

Source: Company, Centrum Research

10

Coal India Ltd.


FSA supplies tilted towards few subsidiaries and thus could limit FSA

fulfillment……

We observe that ~65% of new FSA quantity requirement (for 28000 MW power capacity expected

to be commissioned between FY10-FY12) would have to be supplied through two subsidiaries

(MCL & CCL) based on the LoAs signed by them. This would mean an increase in supply of 35-40%

in FY13E by MCL & CCL from their existing levels for fulfilling FSA commitments, which we believe

could be difficult (despite major expansions at MCL & CCL) and as a result penalty clause might

kick-in for these specific subsidiaries. But as pointed out earlier, imports could be an option.

However, fast tracking of projects at MCL and CCL would be of paramount importance.

Exhibit 14: Majority of coal to be supplied from just few subsidiaries for new FSA’s

(In MT) Linkage LOA FY10-12 80% Cutoff FY12 Sales New FSA qty as % of sales

SECL 23.4 18.7 111.7 16.8

ECL 9.6 7.6 30.7 24.9

MCL 53.7 42.9 102.5 41.9

CCL 20.9 16.8 47.7 35.2

WCL 2.3 1.8 41.0 4.4

NCL 4.2 3.4 63.0 5.3

BCCL 2.6 2.1 31.0 6.6

Others 2.4 4.0

Total 119.0 95.2 431.7

Source: Company, Centrum Research

Penalties minimal and impact limited on overall operational profit……

We estimate no impact on CIL due to penalties imposed for not fulfilling the new FSAs with 80%

trigger level as the penalties have been done away with for the first three years and have been

fixed at just 0.01% of the value of shortfall from fourth year onwards. We don’t see any financial

impact on CIL but would have been happier with a slightly higher penalty percentage as that

would have given CIL the incentive to produce more and meet the FSA requirements at all cost. We

still believe that CIL would push for supplying as much of FSA quantities as possible even after a

diluted penalty clause in place.

Inventory clearance could help in adding to production growth

We note that CIL needs inventory liquidation in addition to production growth to meet the

additional FSA quantities and in the process achieve higher sales growth. CIL had ~2 months

inventory of ~70 MT at the start of FY12 and had liquidated ~19 MT during 9MFY12 but it again

added more than that during Q4FY12E on the back of higher production and ended FY12 with ~72

MT of inventory. We therefore are not too optimistic on the inventory liquidation front for CIL but

with improvement in availability of rakes and better logistics going ahead we expect inventory

liquidation of 5MT each year through FY13-15E.

Exhibit 15: Inventory liquidation to happen during FY13-15E

80

70

60

69

72

67

62

57 57 57

(Million tonne)

50

40

30

20

10

0

(10)

5 5 5

-3

0 0

FY11 FY12E FY13E FY14E FY15E FY16E FY17E

Inventory Outstanding Inventory Sales

Source: Company, Centrum Research

11

Coal India Ltd.


Sales volume to reach 463 MT in FY13E, 546 MT by FY17E

We expect CIL sales volume to reach ~546 MT by FY17E (CAGR of 4.7%). We see ~7% sales growth

in FY13E to 463 MT on the back of higher production and inventory sales (5 MT) supported by

better logistics (higher availability of railway rakes and increased road/conveyor belt infrastructure

for evacuating coal from pitheads). We remain conservative on our sales growth estimates after

FY15E (with assumption of no further inventory sales post FY15E) as we note that constraints in

transporting higher quantities of coal (~500 MT) could remain a challenge in addition to achieving

higher production growth from the new projects in the first place. We see e-auction sales volume

remaining almost constant at 47-48 MT with ~10% share in the overall sales mix.

Exhibit 16: Sales volumes to reach 530 MT by FY17E

600

550

500

450

400

350

300

7.0

4.9 4.9

4.0

3.0

1.9

425 432 463 486 510 525 546

FY11 FY12E FY13E FY14E FY15E FY16E FY17E

Sales (MT)

YoY % Growth

8

7

6

5

4

3

2

1

0

Source: Company, Centrum Research

Railway rakes availability remains the key for dispatch growth

CIL ships ~75% of its coal through railway rakes (~50%) and merry-go-round (MGR) trains (~25%).

The rakes availability from Railways have remained erratic in the past and has led to lower overall

supply growth as road transportation is not only costlier but also unviable (due to distance) in

some cases for the power utilities consumers. CIL received 160/164/171 rakes/day on an average in

FY10/FY11/FY12 but the ideal requirement stands at ~185-190 rakes/day and to meet the

additional production at ~55% shipment through railways, CIL would require ~200 rakes/day in

FY14E and ~228 rakes/day by FY17E. We have assumed 55% shipment through railways in

calculating our rakes/day requirement for coal transportation in the long run and believe that in

the wake of lower rakes availability, roads and new MGR infrastructure would not be sufficient for

achieving the required dispatch growth and also our sales volume assumption of ~546 MT by

FY17E. The encouraging sign for CIL is that in recent months, rake availability has been at its all

time high of 195-200 rakes/day after PMO’s intervention in the coal crisis in India. We note that

some of the new power plants are getting built with MGR facilities which can help reduce the

burden on railway wagons but road transportation remains challenging overall and we strongly

believe that increased transportation by railways is a must for CIL going ahead. We expect rakes

availability of 187/200 rakes/day in FY13E/14E.

Exhibit 17: Railways account for half of total coal shipment from Coal India

FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E

Total Sales (MT) 416 425 432 463 486 510 525 546

Dispatch thru rail (MT) 210 216 225 245 262 280 289 300

% share 50.5 50.9 52.0 53.0 54.0 55.0 55.0 55.0

Rakes/day 160 164 171 187 200 213 220 228

Source: Company, Centrum Research

12

Coal India Ltd.


E-auction volumes to remain stable, proportion to fall gradually

CIL management has indicated that e-auction sales can be brought down to 7% of overall sales

volume by FY17E from 11-12% currently in the event of a shortfall in meeting FSA quantity. We

note that e-auction sales mainly happen to customers who arrange for road logistics of the same

themselves and power utilities when offered the e-auction coal in Oct-11 failed to lift the available

5 MT quantity due to logistics constraints. We expect e-auction quantities to remain largely stable

but its sales percentage to go down gradually to 9% by FY17E from 11% in FY12E. We expect

higher commitments for FSA quantity going forward in each successive year to put pressure on e-

auction sales but in the absence of sound logistics plans from buyers do not foresee a major

reduction in e-auction sales.

Exhibit 18: E-auction sales volume to remain largely stable

50.0

49.0

48.0

47.0

11.2

11.0

10.5

10.0

9.5

9.0 9.0

12.0

11.0

10.0

9.0

46.0

8.0

45.0

7.0

44.0

6.0

43.0

42.0

47.7 47.6 48.6 48.6 48.4 47.2 49.1

FY11 FY12E FY13E FY14E FY15E FY16E FY17E

5.0

4.0

E-auction sales

% share in total sales

Source: Company, Centrum Research

13

Coal India Ltd.


Higher reduction in e-auction volumes can affect profitability adversely but

seems unlikely

Our stress case analysis on e-auction volumes suggests that 20% reduction in e-auction volumes in

FY13E (diverted to FSA customers at notified prices) could lead to a drop in e-auction coal EBITDA

by ~22% but the resultant drop in overall CIL EBITDA would be lower at ~6%. But we believe that

such a scenario is highly unlikely as the management as well as coal ministry have indicated that e-

auction sales would not be considerably reduced in order to meet FSA requirement. Also, we note

that diverting a substantial portion of e-auction sales to power utilities has logistical constraints

which were well recognized when CIL had offered its e-auction quantity of 5MT in Oct-11 to power

utilities who ultimately could not lift the e-auction coal at notified prices. In our base case scenario,

we expect e-auction sales volume in absolute terms to remain stable at ~48.5 MT from FY13E to

FY15E and EBITDA contribution from e-auction coal to progressively come down to 31% in FY15E

from ~40% in FY12E. Again, we believe market concerns on a huge fall in e-auction volumes and

resultant fall in CIL profitability may be unfounded.

Exhibit 19: 20% drop in e-auction volumes in FY13E could impact EBITDA by only 6%

FY11E FY12E FY13E FY14E FY15E

E-auction volumes (MT) 47.7 47.6 48.6 48.6 48.4

E-auction realizations (Rs/t) 1,846.3 2,604.9 2,683.0 2,763.5 2,846.4

Blended COP of CIL (Rs/t) 833.4 992.7 1001.1 1019.9 1038.4

Base Case - FY13E Onwards

E-auction coal EBITDA (Rsmn) 48,335 76,692 81,703 84,654 87,520

CIL overall EBITDA (Rsmn) 166,754 190,076 223,534 248,497 278,725

EBITDA of e-auction (%) 29.0 40.3 36.6 34.1 31.4

Bearish Case - FY13E Onwards

E-auction volumes (MT) 47.7 47.6 38.1 34.3 30.8

E-auction coal EBITDA (Rs mn) 48,335 76,692 64,007 59,718 55,732

Drop in e-auction coal EBITDA from base case (%) (21.7) (29.5) (36.3)

CIL overall EBITDA (Rsmn) 166,754 190,076 210,262 230,024 255,548

Drop in CIL EBITDA from base case (Rsmn) (5.9) (7.4) (8.3)

EBITDA of e-auction (%) 29.0 40.3 30.4 26.0 21.8

Source: Company, Centrum Research

14

Coal India Ltd.


Shift to GCV based pricing is positive but price increase is what

matters the most

GCV based pricing shift implemented

Coal India has shifted its pricing mechanism from UHV (useful heat value) to GCV (gross calorific

value) which involves pricing of coal in different bands of gross calorific value within a range of 300

Kcal/Kg. The new system is more transparent and prices the coal in a more efficient manner

according to its usage and effectiveness based on gross calorific value for the end customer. We

see GCV based pricing as a positive step from the company.

Exhibit 20: GCV based pricing

Pithead run of mine price (Rs/tonne)

GCV Bands (Kcal/kg) Power utilities, defense & fertilisers Others

>7,000 4,870+150/100kcal 4870+150/100kcal

6,700-7,000 4,870 4,870

6,400-6,700 4,420 4,420

6,100-6,400 3,970 3,970

5,800-6,100 2,800 2,800

5,500-5,800 1,450 1,960

5,200-5,500 1,270 1,720

4,900-5,200 1,140 1,540

4,600-4,900 880 1,180

4,300-4,600 780 1,050

4,000-4,300 640 870

3,700-4,000 600 810

3,400-3,700 550 740

3,100-3,400 500 680

2,800-3,100 460 620

2,500-2,800 410 550

2,200-2,500 360 490

Source: Company, Centrum Research

Price increase is what matters the most now

CIL also proposed price increases across GCV grades after announcing the shift to GCV based

pricing in Jan-12 but immediately saw negative response from the power utilities and after

intervention from power and coal ministries was forced to roll back the price hike and instead

propose the above mentioned price list which makes the overall structure revenue neutral. We see

this development as a negative from price setting point of view and believe that price increase is

what matters the most for the company right now. The company last increased prices in Feb-11

when it increased coal prices for certain sectors and certain grades by ~30%. It has indicated a

relook on prices soon and we believe that ~8% price increase is required for covering higher cost

on employee and operational front which have come through in the last year. However with

government intervention and pressure from power ministry on increasing the coal prices (which

negatively affects the upcoming power capacity and increases the prospects of power tariff hikes

in the country), we expect only 4% price increase each in FY13E & FY14E from Coal India on the

new GCV based price list. CIL is supposed to have a relook at current prices during Q1FY13E and

recent media reports suggest that the CIL management might announce a moderate price increase

before the end of April 2012.

Exhibit 21: Coal India blended realizations

Price (Rs/tonne) FY10 FY11 FY12E FY13E FY14E

Raw coal total 997 1,091 1,384 1,422 1,472

% increase 9.5 26.9 2.7 3.5

Raw coal (excl e-auction & washed coal) 987 1,050 1,182 1,229 1,278

% increase 6.4 12.5 4.0 4.0

Source: Company, Centrum Research

15

Coal India Ltd.


Higher increase is possible in low GCV based coal (E&F grades)

Coal India produces ~75% of its overall production in E&F grade with calorific value ranging from

3600Kcal/kg to 4800 Kcal/kg. Also, almost 75% of the overall production is supplied to power

utilities and fertilizer sectors where the coal pricing is in the lowest band and discount to global

benchmark coal prices is between 70-80%. We note that price range for three-fourths of CIL coal of

GCV range 3600-4800 Kcal/kg ranges from Rs550-880/tonne for the regulated sector (power

utilities, defense & fertilizers). This is well below the overall average price for CIL and is also at 75-

80% discount to global coal price (Ref: Indonesian coal). Though we estimate a blended increase in

coal price of ~4% from the company, we anticipate that price increase of more than 4% could be

effected in this category as compared to higher GCV based coal (in which the discount to global

price is already low). Also price increase of ~30% for non regulated sectors like cement, steel and

base metals was undertaken by CIL in Feb-11 but further increase could be done in the next

expected price revision as discount to global benchmark still remains between 60-70%. We

anticipate ~6% increase in prices of E&F grade coal and lower increase in high grade prices thereby

resulting in an overall increase of 4% in blended realizations in FY13E/14E.

Exhibit 22: Comparison of coal prices, CIL price offers huge discount

GCV Range Coal India Price (Rs/tonne) Global Price (Indonesia coal) Coal India discount %

Grade (Kcal/Kg) Regulated Non regulated US$/tonne Rs/tonne Regulated Non regulated

A 6,700 4,420 4,420 117.6 5,880 (24.8) (24.8)

B 6,200 3,970 3,970 106 5,300 (25.1) (25.1)

C 5,700 1,450 1,960 90.7 4,535 (68.0) (56.8)

D 5,400 1,270 1,720 85.6 4,280 (70.3) (59.8)

D 5,000 1,140 1,540 79.1 3,955 (71.2) (61.1)

E 4,400 780 1,050 63.8 3,190 (75.5) (67.1)

F 4,200 640 870 57.8 2,890 (77.9) (69.9)

Source: Company, Centrum Research

Wage costs have increased but employee cost/tonne to remain largely stable

from FY13E onwards

CIL completed the wage agreement negotiation for its 3.6 lakh non-executive workforce and

provided for ~25% increase in gross wages as on June 30 2011. The wage hike has become

effective from 1 st July 2011 and is effective for five years. The minimum basic wage has been

increased by 88% to Rs15712/month and special allowance has been fixed at 4% of basic instead of

a fixed amount. Our calculation of the revised pay structure shows an increase of ~28% in the

monthly wage from Rs13969 earlier to Rs17912 after revision. Total wage cost increase stands at

Rs40bn on an annual basis and Rs25bn is being provided by CIL in FY12E on account of actuarial

wage provision, thus implying an annual increase of Rs65bn. In addition, the annual increment has

been fixed at 3% of the basic and variable DA would be adjusted according to the annual WPI. We

have accounted for annual 3% hike in basic and 6% inflation for variable DA calculation for our

calculations in gross hike in wages from FY13E onwards. We see further wage increase of 9% in

FY13E and above 8% increase in subsequent years till the end of current wage agreement in FY17E

based on increase in basic and allowance for variable DA based on WPI.

Exhibit 23: Calculation of monthly wage cost hike

(Rs/month)

Earlier

FY12

(Q2 onwards) FY13 FY14 FY15 FY16 FY17

Basic Wage 8,360 15,712 16,183 16,669 17,169 17,684 18,215

Attendance bonus (10% of basic) 836 1,571 1,618 1,667 1,717 1,768 1,821

Special DA (4% of basic) 150 628 647 667 687 707 729

Variable DA 4,623 - 1,075 2,246 3,521 4,907 6,411

Total 13,969 17,912 19,524 21,249 23,094 25,066 27,175

Increase 3,943 1,612 1,725 1,845 1,973 2,109

% Increase 28.2 9.0 8.8 8.7 8.5 8.4

Source: Company, Centrum Research

We expect employee cost to reach ~Rs237bn for FY12E with Rs55bn hike coming from the wage

revision. CIL has already made provision of ~Rs15bn in Q2-Q3 FY12 and would be likely making a

provision of Rs40bn in Q4FY12E. We expect employee cost of Rs242bn and Rs256bn in FY13E and

FY14E respectively.

16

Coal India Ltd.


Exhibit 24: Wage cost to trend upwards

280

260

240

220

200

180

160

140

120

100

255.6

237.1

242.1

30.2

182.1

166.6

9.3

2.1

5.6

FY10 FY11 FY12E FY13E FY14E

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

Employee expenses (Rs bn)

% Increase

Source: Company, Centrum Research

Exhibit 25: Wage cost on a per tonne basis to remain largely flat after FY12E due to reduction

in employee strength and higher production levels

1,000,000

900,000

800,000

700,000

600,000

500,000

400,000

300,000

200,000

FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E

No. of employees Cost/Employee Cost/tonne - RHS (Rs)

600

550

500

450

400

350

300

Source: Company, Centrum Research

17

Coal India Ltd.


Low cost and open cast operation remains core strength

Open cast mining leads to lower cost and high productivity

Coal India produces ~90% of its coal through open cast mining which leads to higher productivity

per employee and positions CIL among the lowest cost coal producers in the world. The cost of

production in open cast mines is ~Rs525/tonne (~US$10/tonne) which is in the lowest decile of the

global cost curve and is almost one-fifth of underground mining cost. With 90% share of open cast

mining in overall operations, CIL blended cost of production stands at ~Rs750/tonne

(~US$15/tonne). Average coal output per man shift in open cast mines in FY11 was 10.1 tonnes, as

compared to 0.8 tonnes in underground mines, showcasing the higher productivity and low cost

advantage of open cast mining.

Exhibit 26: Open cast mining leads to lower cost and high productivity

FY07 FY08 FY09 FY10 FY11

Production (MT)

Open cast 317.6 335.9 359.8 388.0 391.3

Underground 43.3 43.5 44.0 43.3 40.0

Total 360.9 379.4 403.8 431.3 431.3

Share (%)

Open cast 88.0 88.5 89.1 90.0 90.7

Underground 12.0 11.5 10.9 10.0 9.3

Cost/tonne (Rs)

Open cast 447 476 507 520

Underground 2,254 2,584 2,660 2,796

Total 660 715 738 745 806

Output per man shift (tonne)

Open cast 8.0 8.6 8.9 9.5 10.1

Underground 0.7 0.7 0.8 0.8 0.8

Source: Company, Centrum Research

Efficient subsidiaries could see increased production share

CIL’s most efficient subsidiaries are NCL and MCL with high manpower productivity, ~98% open

cast mining operations, higher PBT/tonne as compared to all other subsidiaries and ~40% share in

the total capacity of CIL. We see this as a positive for the company as major expansions are planned

by CIL in MCL and also capacity utilization can see an increase in both NCL and MCL from the

current levels which are below 90%. However, we remain concerned on the fact that NCL has

suffered from lower coal mining in various mines and MCL has suffered production losses due to

law and order situation in the recent past.

Exhibit 27: MCL & NCL are efficient subsidiaries with open cast operations

(In MT) ECL BCCL CCL NCL WCL SECL MCL CIL-Total

Production 18.9 20.3 29.3 43.2 30.9 79.7 68.4 291.2

- Open Cast 14.0 17.7 28.6 43.2 24.7 67.8 66.8 263.1

- Underground 5.0 2.6 0.8 0.0 6.2 11.9 1.6 28.1

- % Open cast 73.8 87.1 97.4 100.0 79.9 85.1 97.6 90.4

Sales 20.8 22.0 33.9 44.2 30.5 83.8 74.8 310.5

Manpower 78258 65088 50175 16339 57109 76289 22025 372514

Manpower productivity 0.9 1.1 2.1 9.7 2.0 3.8 11.3 2.9

FY11 PBT (Rs mn) 1,066 10,937 18,602 39,564 10,680 37,771 40,393 164,632

FY11 Sales 29.7 29.4 46.4 64.2 42.6 109.0 102.1 424.5

PBT/tonne (Rs) 36 372 401 616 251 346 396 388

Current annual Capacity 32 33 48 77 47 109 115 462

Source: Company, Centrum Research

18

Coal India Ltd.


CIL - Key assumptions and estimates

Exhibit 28: CIL key assumptions

FY09 FY10 FY11 FY12E FY13E FY14E FY15E

Volumes (MT)

Production 403.7 431.3 431.3 435.8 457.6 480.5 504.5

YoY % 6.8 0.0 1.1 5.0 5.0 5.0

Sales

Linkage (FSA, MoU etc) 331.3 352.9 357.0 367.6 395.6 415.1 428.0

E-Auction 48.9 43.1 47.7 47.6 48.6 48.6 48.4

Washed 14.9 14.6 15.5 15.1 16.2 19.4 30.6

Total Sales 400.8 416.0 424.5 432.5 462.6 485.5 509.5

YoY % 3.8 2.1 1.9 7.0 4.9 4.9

Realization (Rs/tonne)

Linkage (FSA, MoU etc) 844 987 1,050 1,182 1,229 1,278 1,316

E-Auction 1,481 1,540 1,846 2,605 2,683 2,764 2,846

Washed 2,267 2,165 2,533 2,128 2,192 2,257 2,325

Blended 878 997 1,091 1,384 1,422 1,472 1,528

YoY % 13.5 9.5 26.9 2.7 3.5 3.8

Costs/tonne of sales (Rs)

Stores & spares 121 120 123 120 120 120 120

Employee expenses 493 400 429 548 523 526 529

Contractual expenses 83 92 108 110 121 133 146

OB Removal expenses 54 73 62 60 60 60 60

Total Costs 953 864 908 1,060 1,050 1,069 1,088

Costs after OB adj. 898 791 847 1,000 990 1,009 1,028

Source: Company, Centrum Research Estimates

Exhibit 29: Centrum vs consensus

Centrum Bloomberg Consensus Variance (%)

FY13E FY14E FY13E FY14E FY13E FY14E

Net Sales (Rsbn) 681.7 738.6 676.4 732.2 0.8 0.9

EBITDA (Rsbn) 195.8 219.4 205.4 229.3 (4.7) (4.3)

PAT (Rsbn) 167.9 188.1 165 184.9 1.8 1.7

EPS (Rs) 26.6 29.8 26.1 29.0 1.9 2.7

Source: Company, Centrum Research Estimates

19

Coal India Ltd.


Sensitivity analysis

Exhibit 30: FY13E EPS sensitivity to coal volumes and blended realizations

FY13E Adj. EPS

Realizations

3% 2% Base (2%) (3%)

3% 32.5 32.0 30.9 29.9 29.3

2% 32.0 31.5 30.5 29.4 28.9

Volumes

Base 31.1 30.6 29.5 28.5 28.0

(2%) 30.1 29.6 28.6 27.6 27.1

(3%) 29.6 29.1 28.1 27.1 26.6

Source: Company, Centrum Research Estimates

Exhibit 31: FY14E EPS sensitivity to coal volumes and blended realizations

FY14E Adj. EPS

Realizations

3% 2% Base (2%) (3%)

3% 36.1 35.6 34.4 31.0 30.5

2% 35.6 35.0 33.9 30.6 30.0

Volumes

Base 34.6 34.0 32.9 29.6 29.1

(2%) 31.1 30.5 29.5 26.5 26.0

(3%) 30.6 30.0 29.0 26.0 25.5

Source: Company, Centrum Research Estimates

20

Coal India Ltd.


Financials

Revenue CAGR of 8.8% during FY11-13E

We expect CIL to register net sales CAGR of 8.8% during FY12-15E to reach ~Rs803bn in FY15E. We

expect sales volume CAGR of 5.6% and blended realization CAGR of 3.3% during FY12-15E. We

expect e-auction volumes to remain flat at ~48.5 MT and expect washed coal volumes to go up

from FY15E only.

Exhibit 32: Revenue CAGR of 8.8% during FY12-15E

900

800

700

600

500

400

300

200

100

0

18.4

14.4

12.7

9.5

8.4 8.7

467 526 623 682 739 803

FY10 FY11 FY12E FY13E FY14E FY15E

20.0

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

Net Sales (Rs bn)

% growth YoY

Source: Company, Centrum Research Estimate

EBITDA to remain strong, margin to improve

We expect adjusted EBITDA (adjusted for overburden provisioning) CAGR of 13.6 % during FY12-

15E with EBITDA margin improving to 34.7% in FY15E from 30.5% in FY12E. We see gradual pick up

in volumes and slow and steady improvement in realizations to lead to margin improvement.

Exhibit 33: EBITDA CAGR of 13.6% during FY12-15E

300.0

278.7

40.0

250.0

223.5

248.5

38.0

200.0

150.0

100.0

50.0

138.0

29.6

166.8

31.7

190.1

30.5

32.8

33.6

34.7

36.0

34.0

32.0

30.0

28.0

0.0

FY10 FY11 FY12E FY13E FY14E FY15E

26.0

EBITDA - adj (Rs bn) EBITDA Margin %

Source: Company, Centrum Research Estimate

21

Coal India Ltd.


Return ratios to remain strong

We expect return ratios to remain strong for CIL due to strong operational performance even

though increasing cash pile pressure on returns remains. We see ROE moving from 30.8% in FY12E

to 27.9% in FY15E. We see ROCE moving from 30.9% in FY12E to 28.6% in FY15E.

Exhibit 34: Return ratios to remain strong despite growing cash pile

33.0

32.0

31.0

30.0

29.0

28.0

27.0

26.0

25.0

31.3

32.3

30.9 30.9

30.8 30.8

29.9

29.0

29.2 28.6

28.2

27.9

FY10 FY11 FY12E FY13E FY14E FY15E

32.0

31.5

31.0

30.5

30.0

29.5

29.0

28.5

28.0

27.5

27.0

ROE (%) ROCE (%)

Source: Company, Centrum Research Estimate

22

Coal India Ltd.


Key risk and concerns

Slow ramp up in production

We have assumed 5% production growth for CIL from FY13E to FY15E taking into account

improvement in operational performance at various coal fields and fast tracking of project

approvals. Lower to flat production going forward could seriously impact our estimates and could

also lead to penalties on the FSA front for the company. Low production growth remains a key risk

to our estimates and positive stance on Coal India.

Monsoons and logistics issues curtailing sales

Sales volumes for CIL depend not only on the production but also proper logistics and monsoon

situation in India. We note that strong monsoon (similar to FY12) and constraints on logistics

(lower rake availability by railways and poor road transport etc) could lead to lower-than-expected

sales volumes. WE have also assumed 5 MT of annual inventory sales in the next three years which

largely depends on better logistics.

No price increase allowed by the government

We have built 4% price increase on notified prices for CIL in FY13E/14E. Our estimates could be

negatively affected if regulatory constraints prevent CIL from realizing the hike in prices going

forward.

E-auction volumes diverted for FSA sales in a major way

We have assumed that e-auction volumes would remain stable at ~48.5 MT going forward but if a

major chunk of these volumes are diverted for meeting new FSA commitments then it would have

a negative impact on CIL’s operational profit.

Penalties are paid due to new FSA signing

New FSA signing which is expected soon would have a penalty clause for non-fulfillment of

quantities. We don’t expect CIL to bear any penalties but if the penalty trigger level is higher and

CIL is forced to pay penalties to buyers for non-fulfillment of coal supplies, it would affect our

estimates negatively.

23

Coal India Ltd.


Valuation – attractive, recommend BUY

We have used DCF and EV/EBITDA valuation for valuing CIL stock.

We have valued CIL at 7x FY14E adj. EV/EBITDA (premium of ~15% to global CY13E average of 6.2x

for coal players). We believe that this premium is justified as CIL is one of the lowest cost producers

with no downward risk to prices and also no risk to selling coal in the domestic market which

remains in huge deficit. We have taken adjusted EBITDA (after adding the overburden removal

expenses) for our valuation and get a fair value of Rs395/share for CIL from our EV/EBITDA

valuation. At our target price, the stock discounts its FY14E adj. EPS of Rs 32.8 by 12x (around 20%

premium to global average).

Exhibit 35: CIL EV/EBITDA valuation

(Rsbn)

FY14E

FY14E adj. EBITDA 248.5

Exp EV/EBITDA Multiple (x) 7.0

Expected EV 1,739.5

Add Cash+Investments 768.9

Less Debt 12.5

Mkt Cap Expected 2,495.9

Exhibit 36: Global peer valuation

Fair Value 2,495.9

No. of Shares (bn) 6.3

Fair Value (Rs) 395.1

Source: Company, Centrum Research Estimates

P/E EV/EBITDA ROE (%) EBITDA Margin (%)

Company Name CY12 CY13 CY14 CY12 CY13 CY14 CY12 CY13 CY14 CY12 CY13 CY14

China Shenhua Energy Co Ltd 10.4 9.3 8.6 5.9 5.3 4.9 20.1 20.0 19.2 40.0 39.8 39.8

Peabody Energy Corp 9.4 6.5 6.0 5.8 4.8 4.6 14.4 16.9 18.2 25.8 28.2 28.3

Bumi Resources Tbk PT 10.1 7.5 6.1 5.9 5.1 5.3 32.1 32.0 34.9 31.7 32.1 26.6

CONSOL Energy Inc 15.8 12.0 11.0 6.9 6.0 5.4 10.2 12.3 13.4 27.5 29.1 30.2

Adaro Energy Tbk PT 10.1 8.8 8.8 5.3 4.7 4.8 24.2 24.5 20.3 35.3 35.3 32.2

Exxaro Resources Ltd 7.3 6.7 6.6 8.3 8.5 8.3 40.0 32.0 26.7 37.7 38.1 41.5

China Coal Energy Co Ltd 8.4 7.1 6.9 5.7 4.7 4.3 13.0 13.9 13.9 21.6 22.6 22.4

Yanzhou Coal Mining Co Ltd 7.6 7.0 7.2 6.9 6.2 6.2 18.9 18.2 15.8 31.8 31.3 27.7

New Hope Corp Ltd 19.5 18.5 15.3 11.3 9.5 7.8 8.6 8.3 7.1 33.5 37.5 39.0

Whitehaven Coal Ltd 33.7 14.3 11.3 16.6 8.2 6.6 6.6 15.9 16.5 27.4 38.9 38.9

Arch Coal Inc 13.2 10.2 8.3 6.0 5.4 5.1 1.2 3.8 7.0 22.0 22.7 22.3

Global Average 13.2 9.8 8.7 7.7 6.2 5.7 17.2 18.0 17.6 30.4 32.3 31.7

Coal India 11.2 10.1 8.9 6.3 5.3 4.4 30.8 29.2 27.9 28.7 29.7 30.9

Source: Bloomberg, Centrum Research Estimates

24

Coal India Ltd.


DCF value of Rs 363/share

WE have also used DCF valuation for finding out the fair value of CIL stock. Our DCF assumptions

are as follows:-

WACC of 12.1% and terminal growth rate of 2.5%

26% Mining tax impact from FY14E and gradual reduction in e-auction volumes to 9% by FY17E

Exhibit 37: CIL DCF Valuation

(Rs mn) FY12E FY13E FY14E FY15E FY16E FY17E FY18E ----FY27E Terminal Value

PBT - Pre Tax Profit before mining tax 145,804 175,201 196,541 237,766 283,819 310,485 344,032 752,355

Less: Mining tax @26% on previous year PBT - - 45,552 51,101 61,819 73,793 80,726 180,947

PBT 145,804 175,201 150,989 186,665 222,000 236,692 263,306 571,408

Less: Tax (@33% 48,115 57,816 49,826 61,600 73,260 78,108 86,891 188,565

PAT 97,689 117,385 146,715 176,167 210,559 232,376 257,141 563,791

Add: Overburden removal adjustment 25,947 27,758 29,131 30,005 30,905 31,832 32,787 42,780

Add: Depreciation 18,324 20,574 22,824 25,107 27,618 30,379 31,291 40,827

Less: Capex 50,000 55,000 60,000 60,000 60,000 60,000 65,000 70,000

Less: Inc. in Working Capital 19,603 41,696 48,580 24,079 25,694 27,641 29,023 45,025

FCFF 72,357 69,021 44,538 96,098 121,569 133,154 146,469 351,425 3,743,643

WACC 12.1%

Terminal Growth Rate 2.5%

Bloomberg WACC 9.9%

EV (FY13E) 1,617,408

Add: Net Cash (FY13E) 675,812

NPV (Equity Value) 2,293,220

No. of Shares (Cr) 6,316

Value/share (Rs) 363

Source: Bloomberg, Centrum Research Estimates

25

Coal India Ltd.


Financials

Exhibit 38: Income Statement

Y/E March (Rsmn) FY11 FY12E FY13E FY14E FY15E

Revenues 526,162 622,719 681,664 738,588 802,639

Growth in revenues (%) 12.7 18.4 9.5 8.4 8.7

Consumption of stores &

spares 52,315 51,894 55,516 58,262 61,145

% of net sales 9.9 8.3 8.1 7.9 7.6

Employee expenses 182,110 237,110 242,100 255,585 269,444

% of net sales 34.6 38.1 35.5 34.6 33.6

Power & fuel 17,546 18,595 20,356 21,848 22,929

% of net sales 3.3 3.0 3.0 3.0 2.9

Overburden removal

expenses 26,185 25,947 27,758 29,131 30,572

% of net sales 5.0 4.2 4.1 3.9 3.8

Total expenses 385,592 458,590 485,888 519,222 554,486

% of net sales 73.3 73.6 71.3 70.3 69.1

EBITDA 140,570 164,129 195,776 219,366 248,153

y-o-y growth (%) 30.8 16.8 19.3 12.0 13.1

EBITDA Margin (%) 26.7 26.4 28.7 29.7 30.9

EBITDA adj (OB removal adj.) 166,754 190,076 223,534 248,497 278,725

Adj. EBITDA Margin (%) 31.7 30.5 32.8 33.6 34.7

Depreciation & Amortization 16,729 18,324 20,574 22,824 25,074

EBIT 123,841 145,804 175,201 196,541 223,078

Interest expenses 791 1,421 1,321 1,221 1,121

Other Income 47,963 58,000 68,000 76,000 87,000

EBT bef. Excep. Items 171,013 202,383 241,880 271,321 308,957

Excep. Items (prior period adj etc) (6,381) (4,000) (4,000) (4,000) (4,000)

EBT 164,632 198,383 237,880 267,321 304,957

Provision for tax 55,959 69,479 82,714 92,640 105,281

Effective tax rate (%) 34.0 35.0 34.8 34.7 34.5

Net Profit Reported 108,674 141,064 167,934 188,087 213,753

y-o-y growth (%) 10.6 29.8 19.0 12.0 13.6

Net Profit adjusted (OB

removal adj.) 125,958 157,924 186,041 207,123 233,771

Adjusted Net Profit Margin (%) 23.9 25.4 27.3 28.0 29.1

Source: Company, Centrum Research Estimates

Exhibit 39: Balance Sheet

Y/E March (Rsmn) FY11 FY12E FY13E FY14E FY15E

Equity Share Capital 63,164 63,164 63,164 63,164 63,164

Reserves & surplus 305,637 376,495 463,138 558,848 680,224

Shifting & rehabilitation fund 16,214 17,835 19,619 21,580 23,738

Shareholders' fund 385,015 457,494 545,920 643,592 767,126

Total Debt 15,536 14,536 13,536 12,536 11,536

Total Capital Employed 400,876 472,355 559,782 656,454 778,988

Gross Block 367,211 407,211 457,211 507,211 557,211

Less: Acc. Depreciation 261,106 279,431 300,005 322,830 347,904

Net Block 101,585 123,261 152,686 179,862 204,787

Capital WIP 20,869 30,869 35,869 45,869 55,869

Net Fixed Assets 122,454 154,130 188,555 225,731 260,656

Investments 10,637 10,637 10,637 10,637 10,637

Cash 521,096 612,249 678,711 758,273 866,187

Sundry debtors 30,256 30,709 33,616 36,424 39,582

Loans & Advances 99,225 119,426 130,730 141,647 153,931

Inventories 55,856 62,821 66,560 71,126 75,957

Total Current Asset 706,433 825,205 909,617 1,007,470 1,135,657

Current Liab. & Prov. 448,725 527,693 559,104 597,461 638,039

Net Current Asset 257,708 297,512 350,513 410,009 497,618

Deferred tax asset 8,732 8,732 8,732 8,732 8,732

Total Assets 400,876 472,355 559,782 656,454 778,988

Source: Company, Centrum Research Estimates

* Adj. EBITDA and PAT after accounting for overburden removal expenses

Exhibit 40: Cash flow

Y/E March (Rsmn) FY11 FY12E FY13E FY14E FY15E

PBT 164,632 210,543 250,648 280,727 319,034

Interest 5,968 5,421 5,321 5,221 5,121

Depreciation 16,729 18,324 20,574 22,824 25,074

Change in working capital 2,029 51,349 13,461 20,066 20,305

Tax 55,959 69,479 82,714 92,640 105,281

Cash flow from operations 135,784 217,780 209,074 238,161 266,411

Change in fixed assets 17,832 50,000 55,000 60,000 60,000

Change in investments (2,185) - - - -

Cash flow from investments (15,647) (50,000) (55,000) (60,000) (60,000)

Change in debt (4,096) (1,000) (1,000) (1,000) (1,000)

Dividends paid 29,561 70,206 81,292 92,377 92,377

Interest paid 5,968 5,421 5,321 5,221 5,121

Cash flow from financing (39,624) (76,627) (87,613) (98,598) (98,498)

Net cash flow 80,512 91,153 66,462 79,563 107,913

Opening cash balance 440,584 521,096 612,249 678,711 758,273

Closing cash balance 521,096 612,249 678,711 758,273 866,187

Source: Company, Centrum Research Estimates

Exhibit 41: Key Ratios

Y/E March FY11 FY12E FY13E FY14E FY15E

Margin Ratios (%)

EBITDA Margin 26.7 26.4 28.7 29.7 30.9

PBT Margin 31.3 31.9 34.9 36.2 38.0

Adj. PAT Margin 23.9 25.4 27.3 28.0 29.1

Growth Ratio (%)

Revenue 12.7 18.4 9.5 8.4 8.7

EBITDA 30.8 16.8 19.3 12.0 13.1

Return Ratios (%)

ROE 28.2 30.8 30.8 29.2 27.9

ROCE 30.9 30.9 31.3 29.9 28.6

Turnover Ratios

Asset turnover ratio (x) 1.3 1.3 1.2 1.1 1.0

Debtors (days) 21 18 18 18 18

Inventory (days) 53 50 50 50 50

Creditor (days) 425 420 420 420 420

Per share Ratios (Rs)

Basic EPS 17.2 22.3 26.6 29.8 33.8

Adj. EPS 19.9 25.0 29.5 32.8 37.0

Book value 61.0 72.4 86.4 101.9 121.5

Cash earnings per share 19.9 25.2 29.8 33.4 37.8

Dividend per share 4.0 9.5 11.0 12.5 12.5

Gearing Ratio (x)

Interest coverage ratio 156.7 102.6 132.6 161.0 199.0

Valuation (x)

P/E (Adj. Fully Diluted) 17.0 13.6 11.5 10.3 9.2

P/BV 5.6 4.7 3.9 3.3 2.8

EV/EBITDA (adj.) 9.7 8.1 6.6 5.6 4.6

EV/Sales 3.1 2.5 2.1 1.9 1.6

M-cap/Sales 4.1 3.4 3.1 2.9 2.7

Source: Company, Centrum Research Estimates

26

Coal India Ltd.


Appendix A

Disclaimer

Centrum Broking Limited (“Centrum”) is a full-service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE) and National Stock Exchange of India Ltd. (NSE). Our

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with a significant percentage of the companies covered by our Research Group. Our research professionals provide important inputs into the Group's Investment Banking and other

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Recipients of this report should assume that our Group is seeking or may seek or will seek Investment Banking, advisory, project finance or other businesses and may receive commission,

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Key to Centrum Investment Rankings

Buy: Expected outperform Nifty by>15%, Accumulate: Expected to outperform Nifty by +5 to 15%, Hold: Expected to outperform Nifty by -5% to +5%, Reduce: Expected to underperform

Nifty by 5 to 15%, Sell: Expected to underperform Nifty by>15%

27

Coal India Ltd.


Centrum Broking Limited

Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio

Manager

Registration Nos.

CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233

DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER)

CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-20-99

PMS REGISTRATION NO.: INP000000456

MCX – SX (Currency Derivative segment) REGN. NO.: INE261454236

Website: www.centrum.co.in

Investor Grievance Email ID: investor.grievances@centrum.co.in

Compliance Officer Details :

Mr. Praveen Malik; Tel: (022) 42159703; Email ID: praveen.malik@centrum.co.in

Registered Office Address

Bombay Mutual Building ,2nd Floor, Dr. D. N. Road, Fort,

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Correspondence Address

Centrum House

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Santacruz (E), Mumbai 400 098.

Tel: (022) 4215 9000

28

Coal India Ltd.

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