abcGlobal Research

Volumes to pick up: We expect Coal India (CIL) to report a volume increase of c25MT pa

over the next two years (c6% CAGR) due to stronger demand and increased production

after being flat in the past two years. We expect the increase in volumes to come mainly

from mines of three subsidiaries (MCL, CCL and SECL) which should contribute about

75% of the production increase over the next 5-10 years. Volume growth in Apr-May 2012

has been encouraging at 6.3%, but 2Q will be crucial (last year impacted by heavy rains).

Import prices cooling off but need to go to USD25-30/ton level to impact CIL, which is unlikely, in our view: International thermal coal prices have fallen by 13-28% in the

last three months since February 2012 to USD88-96/ton. This does not impact CIL as it

sells c90% of its coal at a significant discount of cUSD40/ton (adjusted for low quality).

Coal India likely to meet c60% of the new power project needs from domestic source with

little negative impact on existing sales: The recent government directive of committing to

meet at least 65% of customer requirements (against 50% earlier) as well as higher penalty

(versus negligible earlier) is not likely to affect CIL earnings based on our analysis (see table

7). In our view, CIL can meet its commitment (c60-65%) through increased production,

diversion of some e-auction sales and re-distribution from existing contracts. NTPC, the main

customer, has agreed the proposal, while it is still to be agreed by CIL’s board (key

disagreement are the penalties). We look for further details post the board meeting on 10 July.

1QFY13 preview: We expect CIL to report strong revenue growth of 17% yoy in 1Q

driven by volumes (up 6% yoy) and price (up 11% yoy to INR1,510 per ton, reflecting the

impact of the new pricing system as well as e-auction sales). The provision for wage cost

increases (INR18.5bn in Q1) is likely to lead to net profit growth of 6% to INR43.8bn.

Maintain OW and target price of INR400: We marginally change our estimates;

EBITDA is unchanged for FY13-14, while net profit is up by 2-4% due to higher other

income. We value CIL using a combination of DCF and earnings multiples. Our

unchanged TP implies a PE of 12.6x and EV/EBITDA of 6.7x on FY14e earnings.

Downside risks include lower-than-expected offtake due to logistics constraints or a

decline in production, and the impact of wage increases or implementation of the MMDR

bill not being passed onto customers. Catalysts include better operational performance in

2Q, higher realisation over next 1-2 quarters on back of new pricing system.

Overweight Target price (INR) 400.00 Share price (INR) 353.75 Forecast dividend yield (%) 3.1 Potential return (%) 16.2

Note: Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield

Performance 1M 3M 12M

Absolute (%) 10.5 3.6 -10.5 Relative^ (%) 1.2 3.7 -3.5

Index^ BOMBAY SE IDX

RIC COAL.BO Bloomberg COAL IN

Market cap (USDm) 41,013 Market cap (INRm) 2,234,414

Enterprise value (INRm) 1659819 Free float (%) 10

Note: (V) = volatile (please see disclosure appendix)

Coal India Limited (COAL IN)

OW: Improving operational performance

We expect net profit growth of 6% yoy in Q1FY13, despite wage hike provision; sales to be up 17% yoy

Pick up in volumes in FY13-14e and margin expansion to support strong EPS growth of 17% CAGR

Maintain OW and INR400 target price; strong operational performance in 2Q to act as a positive catalyst

Nat Resources & Energy Metals & Mining Equity – India

9 July 2012

Arun Kumar Singh* Senior Analyst, Indian Power Utilities HSBC Securities and Capital Markets (India) Private Limited +9122 22681778 arun4kumar@hsbc.co.in

Jigar Mistry*, CFA Analyst, Indian Metals and Mining HSBC Securities and Capital Markets (India) Private Limited +9122 22681079 jigarmistry@hsbc.co.in

Murtuza Zakiuddin* Associate Bangalore

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

Issuer of report:

HSBC Securities and Capital Markets (India) Private Limited

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Flashnote

To vote for HSBC in Asiamoney 2012 – www.asiamoney.com/survey/takesurvey/en/BP12/ Click here for more information on HSBC's India Research Team

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Financials & valuation Financial statements

Year to 03/2011a 03/2012e 03/2013e 03/2014e

Profit & loss summary (INRm)

Revenue 520,537 646,765 729,859 786,282EBITDA 152,992 178,989 233,204 263,286Depreciation & amortisation -16,729 -19,402 -21,186 -23,143Operating profit/EBIT 136,263 159,587 212,018 240,143Net interest 28,869 50,714 48,400 49,897PBT 164,632 212,659 261,919 291,540HSBC PBT 165,234 211,802 261,919 291,540Taxation -55,959 -64,772 -81,516 -90,811Net profit 108,673 147,887 180,403 200,729HSBC net profit 112,427 147,030 180,403 200,729

Cash flow summary (INRm)

Cash flow from operations 128,225 235,380 198,460 257,115Capex -24,750 -33,000 -47,000 -31,305Cash flow from investment -22,566 -31,000 -45,000 -29,305Dividends -33,611 -86,183 -94,801 -103,419Change in net debt -73,178 -123,197 -58,659 -124,391FCF equity 77,790 163,085 115,636 186,468

Balance sheet summary (INRm)

Intangible fixed assets 0 0 0 0Tangible fixed assets 150,610 164,208 190,023 198,184Current assets 643,960 799,634 859,441 993,089Cash & others 458,623 581,820 640,478 764,869Total assets 813,973 984,245 1,067,867 1,207,676Operating liabilities 408,178 494,746 517,767 560,266Gross debt 15,536 15,536 15,536 15,536Net debt -443,087 -566,284 -624,943 -749,333Shareholders funds 333,172 394,876 480,478 577,787Invested capital -72,231 -112,724 -108,781 -133,862

Ratio, growth and per share analysis

Year to 03/2011a 03/2012e 03/2013e 03/2014e

Y-o-y % change

Revenue 10.8 24.2 12.8 7.7EBITDA 17.0 17.0 30.3 12.9Operating profit 16.0 17.1 32.9 13.3PBT 14.1 29.2 23.2 11.3HSBC EPS 14.4 30.8 22.7 11.3

Ratios (%)

Revenue/IC (x) -8.4 -7.0 -6.6 -6.5ROIC -145.7 -120.0 -131.9 -136.3ROE 38.0 40.4 41.2 37.9ROA 14.3 16.5 17.6 17.7EBITDA margin 29.4 27.7 32.0 33.5Operating profit margin 26.2 24.7 29.0 30.5EBITDA/net interest (x) Net debt/equity -132.9 -143.3 -130.0 -129.6Net debt/EBITDA (x) -2.9 -3.2 -2.7 -2.8CF from operations/net debt

Per share data (INR)

EPS reported (fully diluted) 17.21 23.41 28.56 31.78HSBC EPS (fully diluted) 17.80 23.28 28.56 31.78DPS 3.90 10.00 11.00 12.00Book value 52.75 62.52 76.07 91.47

Key forecast drivers

Year to 03/2011a 03/2012e 03/2013e 03/2014e

Production (MT) 431 436 458 481Sales (MT) 424 433 460 484ASP (INR/t) 1,178 1,435 1,523 1,562

Valuation data

Year to 03/2011a 03/2012e 03/2013e 03/2014e

EV/sales 3.4 2.6 2.2 1.9EV/EBITDA 11.6 9.3 6.9 5.6EV/IC PE* 19.9 15.2 12.4 11.1P/Book value 6.7 5.7 4.7 3.9FCF yield (%) 3.5 7.3 5.2 8.4Dividend yield (%) 1.1 2.8 3.1 3.4

Note: * = Based on HSBC EPS (fully diluted)

Price relative

265

315

365

415

465

515

2010 2011 2012 2013

265

315

365

415

465

515

Coal India Limited Rel to BOMBAY SE SENSITIVE INDEX

Source: HSBC Note: price at close of 04 Jul 2012

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Demand outstrips supply; fall in imported coal prices does not impact Coal India We expect coal demand in India to register a 9% CAGR over FY13-17e to 1.0bn tons by FY17e, led by

demand from coal-based power plants which is likely to increase from 108GW to 176GW by FY17e

(10% CAGR) as well as an increase in demand from other sectors (captive, steel and cement). However,

we do not expect supply growth to keep pace, rising only c7% over FY13-17, driven by capacity

expansion by CIL and captive mining. Consequently, we expect the coal deficit to rise to c290mt by

FY17e (from c133mt in FY12e) which will have to be met from rising imports (about 221MT in FY17e

from 118MT in FY12, growing at CAGR of 13%). Exhibit 1 gives historical demand and supply and our

estimates for coal in India.

1. India’s coal demand and supply model – Demand to far outstrip domestic supply resulting in increasingly reliance on imports

In MT FY07 FY08 FY09 FY10 FY11e FY12e FY13e FY14e FY15e FY16e FY17e Incremental (FY13-17e)

CAGR (FY13-17e)

Demand Power (Utilities) 308 332 363 380 396 446 517 590 662 721 753 307 11% Captive Power 28 29 34 38 40 41 42 43 45 46 47 7 3% Steel incl Sponge 51 58 57 63 65 69 73 80 86 88 91 22 6% Cement 20 21 19 21 21 22 25 27 30 32 35 12 9% Others 57 63 77 93 95 97 99 100 102 105 107 10 2% Total (a) 464 504 550 595 617 675 755 841 925 991 1,033 358 9% Supply CIL 361 379 404 431 431 436 458 481 505 532 560 124 5% SCCL 38 41 45 50 51 52 53 54 55 57 58 5 2% Captive coal mines 18 21 30 35 35 37 43 59 79 95 108 70 24% Others (captive) 15 16 14 14 16 16 17 17 17 18 18 2 2% Total (b) 431 457 492 531 533 542 570 610 656 701 743 202 7% Shortfall in domestic supply (a-b)

33 47 58 64 84 133 185 230 269 291 290 156 17%

Equivalent imports 103 141 176 205 221 221 118 16% Imports (c) Imports to meet shortfall

43 50 59 68 112 118 141 176 205 221 221 103 13%

- Coking coal 18 22 21 23 29 29 33 39 46 48 51 22 12% - Non-coking coal 25 28 38 44 83 89 109 137 159 173 170 81 14% Note: Actual consumption (supply + imports) is higher than the demand projections in the past due to lot of unorganised sector consuming coal and not entirely captured in the demand estimates by the Ministry of Coal. Our demand projections for FY13-17 is also limited by data reported particularly for category “Others” which includes many sectors for which information is not available.

Source: MOC, CEA, CIL, SCCL, HSBC estimates

International thermal coal prices have fallen significantly in the last 2-3 months since February 2012 with

the Australian New Castle Index down by 28% to USD88.4/ton at end June 2012 from USD123/ton in

February 2012, while the Indonesian Reference Price Index – HBA is at USD96.6/ton (down by 13%

from USD112/ton in February 2012), which are the two major importing destinations for India. This does

not impact CIL as the contracted prices of CIL are far below international prices (INR1,310/ton or

USD23/ton) which after adjusting for low quality of coal comes to cUSD40/ton. Thus the international

coal price needs to come down to USD25-30/ton level, as it also involves transportation cost of about

USD10-15/ton at present, to impact CIL’s pricing which is very unlikely, in our view.

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2. International thermal coal prices have been cooling since March 2012, down 13-28% since February 2012

0

30

60

90

120

150

180

Jul-0

1

Nov-0

1M

ar-0

2

Jul-0

2N

ov-0

2

Mar

-03

Jul-0

3N

ov-0

3

Mar

-04

Jul-0

4

Nov

-04

Mar-0

5Ju

l-05

Nov

-05

Mar-0

6Ju

l-06

Nov-0

6M

ar-0

7

Jul-0

7

Nov-0

7M

ar-0

8

Jul-0

8N

ov-0

8

Mar

-09

Jul-0

9N

ov-0

9

Mar

-10

Jul-1

0

Nov

-10

Mar-1

1Ju

l-11

Nov

-11

Mar

-12

Jul-1

2

Australian thermal coal (Newcastle) - USD/ton Indonesian thermal coal HBA - USD/ton

Source: Bloomberg

1Q operational performance is likely to be strong, 2Q will be crucial Production and sales offtake grew strongly in the first two months of FY13 at 5.6% and 6.3% yoy

respectively. This is compared to flat production in the past two years, and a marginal increase in sales

offtake (up 2.7% pa). We expect this to continue and the company to report a volume increase of c25MT

pa over the next two years (c6% CAGR) due to stronger demand and increased production. However the

actual performance in 2Q is likely to be a catalyst for the stock, in our view, which was last year impacted

by heavy rains. For the full year, CIL has a target for production of 464MT and 470MT for offtake, while

we assume a lower offtake of 460MT in FY13.

3. Production growth picked up in Q4, continued in April and May 12 at 5.6% yoy, to result in better Q1 (1Qe-5.5% yoy)

4. Resulting in improved offtake as well – Offtake grew 6.3% yoy in April and May 12 (1Qe-6% yoy)

96 88

111

135

95 91

114132

9680

115

145

102

0

40

80

120

160

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

e

-12%

-6%

0%

6%

12%

Production (MT) Growth y/y

100 94107114

101 98111114106

94110

123113

0

40

80

120

160

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

e

-12%

-6%

0%

6%

12%

Offtake (MT) Growth y/y

Source: Company data Source: Company data

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Minimal negative impact from new FSA for CIL Earlier this year, the government directed CIL to sign long-term contracts (FSA) with power companies

to supply at least 80% of their requirements. Since CIL could not meet the obligations, it agreed to sign

contracts with negligible penalties (for non-meeting of commitments – see also our note Indian power

and coal - New supply deal won’t hurt Coal India, 3 May 2012). Many of the power customers including

NTPC (largest customer) did not agree to sign the agreements and approached the government, which has

again directed CIL to commit at least 65% of the requirement of new plants (versus a 50% trigger level

earlier, despite committing 80%), and also increasing the penalties for short supply (20-40% from 0.01%

earlier). While this is still to be agreed by CIL, NTPC has already agreed to the proposal. Assuming CIL

agrees to the arrangement and signs the FSA for the power plants having long-term power sale contracts,

our analysis suggest that CIL will likely meet c60% of the commitments in next 3-4 years, while for the

5. Pricing under e-auction and increase in contracted price in Q4 due to new pricing system was a key driver for increase in average realisation for CIL (INR/ton) in FY12; this is likely to continue in FY13-14

883

976

1,08

4

1,18

3

1,44

1

1,52

3

1,56

2

1,39

2

1,58

1

1,51

0

796

844

975

1,04

9

1,23

5

1,31

1

1,35

1

1,17

2

1,29

8

1,31

0

1,34

7

1,48

1

1,58

3

1,84

6

2,59

9

2,88

8

2,98

4

2,85

2

2,85

4

2,85

0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

FY08 FY09 FY10 FY11 FY12 FY13e FY14e 3Q 12 4Q12 1Q13e

CIL avg Contracted coal E-A uction coal

Source: Company data, HSBC estimates

6. E-auction sales share to fall to 9% by FY14e (from c12% in FY12e) as CIL diverts some of it to meet new contract commitments

88%84% 85% 85% 84%

86% 86% 85% 85%87%

8%12% 11% 11%

12%10% 9%

10% 12% 10%

4% 4% 4% 4% 4% 4% 5% 5% 3% 4%

75%

80%

85%

90%

95%

100%

FY08 FY09 FY10 FY11 FY12 FY13e FY14e 3Q12 4Q12 1Q13e

Contracted coal E-Auction coal Washed coal

368in MT 395 410 424 433 460 484 110 123 113

Source: Company data, HSBC estimates

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balance it would push for imports (cost borne by the customers) with little impact on its sales. This is

possible through increased production, diversion of some e-auction sales (already factored by us in our

estimates) and re-distribution from existing contracts. However the re-distribution of coal from existing

customers will largely impact NTPC, which is the largest customer having existing FSA of c112MT. The

requirement from new projects to be commissioned up to FY15 (since FY10) is expected to be about

61MT, while CIL could commit only 40MT under the new FSA.

7. Coal India’s likely FSA commitments for power capacity commissioned up to March 2015

in MT FY13e FY14e FY15e FY16e FY17e

Coal requirement of old power plants commissioned up to FY09 305 305 305 305 305 Coal requirement of new power plants having long term power sale arrangements (PPA) 112 153 186 206 206 Total requirement 417 458 491 511 511 Minimum obligation/commitment of CIL @ 90% of requirement for the old plants and 65% for the new plants respectively under the FSA

347 374 395 408 408

Likely commitment by CIL to the power sector (based on HSBC sales forecasts of CIL) 347 368 387 404 422 % met for new capacity 65% 61% 60% 63% 72% Gap left – likely to be filled by imports with extra costs being passed on to the power utilities 0 6 9 4 -14 CIL likely domestic supply sources Actual supply to the power sector in FY12 312 312 312 312 312 Diversion from E-Auction 10 10 10 10 10 90% of Incremental sales dispatched to power sector 25 46 65 82 100 Total 347 368 387 404 422

Source: HSBC estimates

1QFY13 preview We expect CIL to report strong revenue growth of 17% yoy in 1Q driven by volumes (up 6% yoy) and

price (up 11% yoy to INR1,510 per ton), reflecting the impact of the new pricing system as well as

increased pricing under e-auction sales. The provision for wage cost increases (INR18.5bn in Q1) is

likely to lead to a moderation in net profit growth of 6% to INR43.8bn.

Minor changes to EBITDA estimates for FY13-14 We tweak our estimates to reflect FY12 results, where the contracted pricing was higher driven by new

pricing system while costs were also higher (employee and other operational costs) negating the impact.

Our EBITDA changes are minimal for FY13-14, with only minor increases of 2-4% in our net profit due

to higher other income.

8. Coal India consolidated quarterly earnings summary

INRm 1QFY13e yoy% 1QFY12 2QFY12 3QFY12 4QFY12

Production (MT) 101.6 5.5% 96.3 80.3 114.6 144.6 Offtake (MT) 112.6 6.0% 106.3 93.7 110.3 122.8 Realisation (INR/ton) 1,510 10.7% 1,365 1,403 1,392 1,581 Sales* 176,186 17.3% 150,210 136,214 159,019 201,343 EBITDA* 56,344 5.4% 53,459 29,552 51,000 45,008 Margin % 32.0% (361) 35.6% 21.7% 32.1% 22.4% Other income # 11,925 15.0% 10,369 13,209 13,033 16,127 Net profit (adjusted) 43,833 6.1% 41,308 25,766 40,325 39,626 Net profit (reported) 41,439 25,931 40,378 40,134

Note: *HSBC reclassifies Sales and EBITDA to include income from recovery of transportation and loading charges from customers which COAL reports as other income. This is probably not done by consensus. #Other income excludes income form recovery of transportation and loading charges etc classified under Sales by HSBC Source: Company data, HSBC estimates

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Our FY13-14 net profit estimates are 7-8% ahead of consensus for FY13-14 which we believe is largely

due to our forecast of a price hike in FY13 (c5% on contracted sales) , and better expectations for prices

under e-auctions, resulting in higher margins.

10. Coal India consolidated HSBC earnings versus consensus

INRm _________ HSBC___________ _______ Consensus ________ ________Diff ________ FY13e FY14e FY13e FY14e FY13e FY14e

Revenue* 704,338 758,789 687,996 746,859 2% 2%EBITDA* 207,683 235,793 200,498 225,390 4% 5%Margin % 29.5% 31.1% 29.1% 30.2% 34 90 PBT 261,919 291,540 246,482 273,932 6% 6%Net profit 180,403 200,729 166,825 187,435 8% 7%EPS (INR) 28.6 31.8 26.4 29.5 8% 8%

*Note: HSBC Revenue and EBITDA excludes income from transportation and loading charges in order to compare with consensus Source: HSBC estimates, Bloomberg for consensus as at 2 July 2012

Valuation and risks Reiterate Overweight rating; target price unchanged at INR400

We value CIL based on a combination of DCF and earnings multiple-based valuations (Exhibits 8-8C)

For our DCF, we discount the cash flows assuming an unchanged WACC of 11.3% (cost of equity of

11.8%, cost of debt of 7.5%, and beta of 0.95) to arrive at a value of INR424/share(from INR425).

For our multiples-based valuations, we retain our target PE of 13.0x and target EV/EBITDA of 6.5x for

CIL, a premium of c15% to the Asian coal companies peer group multiples (11.3x CY13e PE and 5.6x

CY13e EV/EBITDA) given the better return profile and earnings stability. Accordingly, our valuation

based on a target PE of 13x is INR413/share (from INR406) and on 6.5x EV/EBITDA is INR336/share

(from INR334).

Our target price for CIL is INR400 based on a weighted average of DCF, PE and EV/EBITDA, to which

we assign weights of 50%, 25% and 25%, respectively. Our target price implies a 12.6x FY14e PE

(versus the current 12.1x FY13e PE) and an EV/EBITDA of 6.7x on FY14e EBITDA (versus the current

6.7x FY13e).

Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and

below the hurdle rate for Indian stocks of 11%. Our target price implies a potential return of 16.2%

9. Coal India consolidated earnings change summary

INRm __________ New ___________ __________ Old___________ ________ Diff__________ FY12e FY13e FY14e FY12e FY13e FY14e FY12e FY13e FY14e

Production (MT) 436 458 481 436 458 481 0.0% 0.0% 0.0% Off take (MT) 433 460 484 433 460 483 0.0% 0.1% 0.1%Average selling price (INR/ton) 1,435 1,523 1,562 1,386 1,462 1,502 3.6% 4.2% 4.0%Revenue 646,765 729,859 786,282 624,228 699,922 755,110 3.6% 4.3% 4.1%EBITDA 178,989 233,204 263,286 187,869 231,270 262,810 -4.7% 0.8% 0.2%Margin % 27.7% 32.0% 33.5% 30.1% 33.0% 34.8% (242) (109) (132)PBT 211,802 261,919 291,540 215,498 254,303 290,076 -1.7% 3.0% 0.5%Tax 64,772 81,516 90,811 68,697 81,169 92,671 -5.7% 0.4% -2.0%% tax rate 30.6% 31.1% 31.1% 31.9% 31.9% 31.9% (130) (80) (80)Net profit 147,030 180,403 200,729 146,801 173,134 197,405 0.2% 4.2% 1.7%EPS (INR) 23.3 28.6 31.8 23.2 27.4 31.3 0.2% 4.2% 1.7%

Source: HSBC estimates

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(including dividend yield of 3.1%), which is above the Neutral band; therefore, we rate CIL Overweight.

Potential return equals the percentage difference between the current share price and the target price,

including the forecast dividend yield when indicated.

11. CIL Calculation of 12-month target price

Method Weight INR/Share

DCF 0.50 424 PE 0.25 413EV/EBITDA 0.25 336Target price (rounded) 400

Source: HSBC estimates

11A. CIL – DCF summary table

Particulars INRm INR/Share

Enterprise value 2,267,234 359Less: Gross Debt 15,536 2Add: Cash & Bank excluding OBR provision 422,892 67Add: Investments 6,637 1Less: Minorities 326 0Equity value 2,680,901 424

Source: HSBC estimates, OBR= Overburden Removal

11B. CIL – PE-based valuation

INR

PE multiple (x) 13.0EPS – Mar 2014e 31.8Value per share 413

Source: HSBC estimates

11C. CIL – EV/EBITDA-based valuation

INRm INR/Share

EV/EBITDA multiple (x) 6.5EBITDA – Mar 2014e 263,286Enterprise value 1,711,362 271Less: Gross Debt 15,536 2Add: Cash & bank excluding OBR provision 422,892 67Add: Investments 6,637 1Less: Minorities 326 0Equity value 2,125,030 336

Source: HSBC estimates, OBR = Overburden Removal

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Key downside risks to our rating and target price include: 1) lower-than-expected offtake because of

logistics constraints or a decline in production; 2) wage cost hikes that the company is unable to pass on

to customers; and 3) implementation of the Mines and Minerals (Development and Regulation) Bill in its

current form, with CIL unable to pass on the additional burden to consumers. According to management,

the negative impact of the MMDR bill could be INR20bn-22bn (probably after reducing the existing

social overheads), which is equivalent to c3% of FY13e sales. This compares to our forecast of INR57bn

(c8.0% of FY13e sales).

12. COAL – Regional and global peer valuation summary sheet

Company Ticker Country Rec Mcap _____ EV/EBITDA _____ ________ PE _________ ________ PB _________ (USDm) CY12e CY13e CY14e CY12e CY13e CY14e CY12e CY13e CY14e

Coal India* COAL IN India OW 40,343 6.8 5.5 4.7 12.3 11.0 10.3 4.6 3.8 3.2 China Shenhua 1088 HK China NR 69,244 5.8 5.3 4.9 11.0 10.0 9.4 2.1 1.8 1.6 China Coal Energy 1898 HK China NR 14,478 6.2 5.2 4.8 10.7 9.4 9.1 1.0 0.9 0.8 Yanzhou Coal 1171 HK China NR 11,910 7.7 7.1 7.1 11.4 10.9 12.1 1.2 1.1 1.1 Fushan Intl 639 HK China NR 1,360 1.2 1.3 1.4 4.9 5.1 5.4 0.5 0.5 0.5 Hidili Industry 1393 HK China NR 570 6.7 5.8 5.3 6.4 5.6 4.5 0.5 0.5 0.5 Chinese Coal – A shares Datong Coal 601001 CH China NR 2,864 4.1 3.3 3.3 16.4 15.4 13.5 1.5 1.5 1.3 Henan Shen Huo I 000933 CH China NR 2,428 6.1 5.2 4.3 12.8 10.4 8.3 2.2 1.8 1.4 Kailuan Clean Coal 600997 CH China NR 2,041 7.8 8.1 7.4 15.4 14.7 15.5 1.7 1.6 1.5 Pingdingshan Tianan 601666 CH China NR 3,746 6.3 5.4 5.0 13.7 12.5 11.3 1.8 1.5 1.4 Shanxi Guoyang 600348 CH China NR 5,826 6.7 6.2 6.3 14.5 12.8 11.7 2.9 2.2 na Shanxi Lanhua Sci-Tech 600123 CH China NR 3,222 7.1 5.7 4.9 11.3 9.2 8.1 2.1 1.7 1.4 Shanxi Lu-An envr I 601699 CH China NR 7,523 8.0 6.8 5.7 13.9 11.9 10.8 2.8 2.3 1.8 Shanxi Xishan Coal 000983 CH China NR 7,723 6.8 6.2 5.1 16.3 15.1 12.9 2.8 2.5 2.0 Regional coal companies Banpu PCL BANPU TB Thailand NR 4,015 5.1 4.8 4.4 8.4 7.7 6.8 1.5 1.3 1.1 Bumi BUM IIJ Indonesia NR 2,568 4.3 3.9 3.3 6.5 5.0 4.0 1.6 1.3 1.2 Aneka Tambang ANTM IJ Indonesia NR 1,382 4.7 4.5 4.6 8.2 8.2 9.5 1.1 1.0 1.0 TB Bukit Asam PTBA IJ Indonesia NR 3,732 5.9 5.3 4.4 9.5 8.7 7.4 3.5 2.9 2.5 Straits Asia Resources SAR SP Singapore NR 1,299 5.1 3.8 3.1 8.2 5.8 4.5 1.9 1.6 1.4

Asian & Regional peers – weighted 6.5 5.7 5.3 12.7 11.2 10.3 2.2 1.9 1.5

US coal companies Alpha Natural ANR US USA NR 1,919 4.4 4.1 3.6 na na na 0.3 0.3 0.3 Peabody Energy BTU US USA NR 6,679 5.8 4.9 4.5 8.8 6.8 6.2 1.2 1.0 0.9 Arch Coal Inc ACI US USA NR 1,462 8.2 6.7 5.6 na 87.5 17.0 0.4 0.4 0.4 CONSOL Energy CNX US USA NR 6,881 7.0 6.1 5.2 16.4 12.5 10.5 1.8 1.6 1.4 Total Average – weighted 6.5 5.7 5.2 12.5 11.6 10.1 2.1 1.8 1.2

*Note: For Coal India, CY12e represents financial year ended 31 March 2013 and so on Source: Thomson Reuters for non-rated stocks, HSBC estimates for rated stocks; priced at close of 2 July 2012

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Arun Singh and Jigar Mistry

Important disclosures

Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 05 July 2012, the distribution of all ratings published is as follows: Overweight (Buy) 50% (26% of these provided with Investment Banking Services)

Neutral (Hold) 38% (26% of these provided with Investment Banking Services)

Underweight (Sell) 12% (17% of these provided with Investment Banking Services)

Share price and rating changes for long-term investment opportunities

Coal India Limited (COAL.BO) Share Price performance INR Vs HSBC rating

history

Source: HSBC

Recommendation & price target history

From To Date

N/A Neutral (V) 21 June 2011 Neutral (V) Overweight (V) 16 August 2011 Overweight (V) Overweight 29 November 2011 Target Price Value Date

Price 1 425.00 21 June 2011 Price 2 472.00 16 August 2011 Price 3 469.00 10 October 2011 Price 4 415.00 29 November 2011 Price 5 380.00 21 February 2012 Price 6 400.00 01 May 2012

Source: HSBC

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HSBC & Analyst disclosures

None of the below disclosures applies to any of the stocks featured in this report.

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