March 28, 2014 Rating Matrix Coal India (COALIN) Rating...

March 28, 2014

ICICI Securities Ltd | Retail Equity Research

Initiating Coverage

Steady volume growth; patience holds key… Coal India (CIL), a Maharatna public sector enterprise, is engaged in mining coal, the key material used in generating thermal power. CIL is the largest coal producing company in the world with huge coal reserves (reserves/production at ~40 years). The company also enjoys a dominant status in the domestic market wherein it contributes ~81% of India’s total coal output and on the demand side meets ~65% of domestic consumption requirements. Furthermore, by virtue of being a majority open cast miner (~90%), CIL also realises healthy operating margins, thereby enjoying consistent cash flows. FY13 was inspiring wherein it witnessed healthy growth in production (3.8% YoY) and sales (7.4% YoY). However, FY14 has been challenging and output has been hit by strikes, cyclone, etc. Nevertheless, CY14 has started on a positive note for CIL wherein policy related changes (relaxation of rules to allow up to 50% expansion in coal projects with annual production up to 8 MTPA) and granting of approvals for 23 projects reflected the strong thrust the government has to increase the domestic coal supply. We believe a relatively swift clearance process and introduction of the mine-developer-operator approach will aid CIL to enhance its output levels. We have modelled coal sales volume growth at 3.7% CAGR for FY13-16E. We are initiating coverage on CIL with a BUY rating and a target price of | 320. One-time capacity expansion; gives thrust to our belief!! In December 2012, the Environment Ministry (MoEF) issued guidelines to grant environmental clearances to existing mine projects for one-time capacity expansion of 25% within the same mine lease area, which had already had a public hearing subject to conditions. Furthermore, on the back of persuasion by the Coal Ministry, in January 2014 the MoEF further relaxed the capacity expansion norms for small mines with capacity up to 8 MTPA. As per the new ruling, mines with capacity up to 8 MTPA can go for one-time capacity expansion of 50% or 1 MT, whichever is higher without holding public hearings. Earlier 25% one-time capacity expansion rule remains the same for mines with capacity greater than 8 MTPA. Faith to last in midst of blackest storms!! CIL has a strong balance sheet with robust cash flows and a healthy liquidity position. In FY13-16E, we expect the topline to grow at a CAGR of 4.1% with EBITDA & PAT de-growing 3.9% & 3.2%, respectively, on the back of declining e-auction realisations and other income yield. We have valued the stock at 6.5x FY16E adjusted EV/EBITDA (adjusted for overburden removal), thereby valuing the company at its international peers’ average FY16E EV/EBITDA of 6.5x & arrived at a target price of | 320. A healthy dividend payout and impressive dividend yield (~4.3% on a normalised basis) reiterate our positive stance on the company. Exhibit 1: Key financials

(Year-end March) FY12 FY13 FY14E FY15E FY16ENet Sales (| crore) 62,415.4 68,302.7 68,007.8 72,695.4 77,087.6 EBITDA (| crore) 15,667.8 18,083.6 14,412.9 14,959.4 16,053.2 Net Profit (| crore) 14,788.2 17,356.4 14,061.1 14,551.3 15,736.4 EPS (|) 23.3 27.5 22.3 23.0 24.9 P/E (x) 12.3 10.4 12.8 12.4 11.5 P/B (x) 4.5 3.7 4.4 3.9 3.4 EV/EBITDA (x) 7.9 6.7 8.7 7.8 6.7 RoCE (%) 32.6 32.3 29.4 27.0 25.4 RoE (%) 36.6 35.8 34.2 31.1 29.3

Source: Company, ICICIdirect.com Research

Coal India (COALIN) | 286

Rating Matrix Rating : Buy

Target : | 320

Target Period : 12-18 months

Potential Upside : 12%

Key Financials (YoY Growth) FY13 FY14E FY15E FY16ENet Sales 9.4 (0.4) 6.9 6.0 EBITDA 15.4 (20.3) 3.8 7.3 Net Profit 17.4 (19.0) 3.5 8.1 EPS (|) 17.4 (19.0) 3.5 8.1

Current & target multiple FY13 FY14E FY15E FY16E

P/E 10.4 12.8 12.4 11.5 Target P/E 11.7 14.4 13.9 12.9 EV / EBITDA 6.7 8.7 7.8 6.7 P/BV 3.7 4.4 3.9 3.4 RoNW 35.8 34.2 31.1 29.3 RoCE 32.3 29.4 27.0 25.4

Stock Data Bloomberg/Reuters Code COAL IN EQUITY /COAL.NSSensex 22,155.0 Average volumes 296594Market Cap (| crore) 180,648.0

52 week H/L 331 / 238

Equity Capital (| crore) 6,316.4 Face Value | 10Promoter's Stake (%) 90.0 FII Holding (%) 5.5 DII Holding (%) 2.4

Price movement

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350

Mar-14Dec-13Sep-13Jun-13Mar-13

2,000

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4,000

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7,000

Price (R.H.S) Nifty (L.H.S)

Comparative Matrix Return % 1M 3M 6M 12MCoal India 11.2 (3.3) (7.2) (8.0) NMDC 2.3 (2.3) 7.8 1.0 GMDC 14.9 12.5 36.1 (26.2)

Analyst’s name Dewang Sanghavi [email protected]

Shashank Kanodia [email protected]


Company background Coal India (CIL), the mining major, was incorporated in November 1975. CIL is the largest coal producer in the world with coal production of 452.2 MT in FY13. The company supplies coal to sectors like power, steel, cement, defence, fertiliser, etc. As of March 31, 2013, CIL operated 462 mines in 81 mining areas across eight states in India, including 169 open cast mines, 270 underground mines and 23 mixed mines (which include both open cast as well as underground mines).

Key highlights:-

CIL has seven wholly-owned coal producing subsidiaries and one mine planning and consultancy company

The company also owns a mining company in Mozambique called Coal India Africana Limitada

CIL was granted the prestigious Maharatna status in April 2011 by the Government of India

The company produces ~81% of India’s total coal production and has a domestic market share of ~65%

Exhibit 2: Product Category

Non coking coal (thermal coal)

It is the main product of the company & is mainly used as thermal grade coal for power generation. It is produced at varied gross calorific value ranging from 2200 kcal/kg to 7000 kcal/kg

Coking coal

It acts as a reducing & heating agent in steel manufacturing & is widely used in blast furnace – BoF route of steel making process. India currently imports close to 70% of its requirements of this type of coal

Semi coking coalIt is used to blend the expensive imported coke to optimise the heating rate & associated costs involved. It is produced in two grades depending on the ash & moisture content

Washed & beneficiated coal

These coals have undergone the process of coal washing or coal beneficiation, resulting in value addition by way of reduction in ash percentage


Exhibit 3: Coal India timeline… s


Shareholding pattern (%) – Q3FY14

Shareholder Holding (%)

Promoters 90.0

Institutional investors 7.9

General public 2.1

FII & DII holding trend (%)

5.6 5.5 5.6 5.4 5.4 5.5 5.5

2.42.32.32.01.71.81.7

0123456

Q1FY

13

Q2FY

13

Q3FY

13

Q4FY

13

Q1FY

14

Q2FY

14

Q3FY

14

%

FII DII

First commercial pricing policy formulated & overall

production crossed 100 million tonne

Incorporated in 1973 as Coal Mines Authority Ltd;

later name changed to Coal India Ltd (CIL) in

1975

Production crossed 200 million tonne

Established subsidiary in Mozambique, went public in November 2010, inclusion in Sensex, awarded Maharatna

status

Production crossed 300 million tonne

1974-76

1980-81

1991-92

1995-96

2003-04

2006-09

2010-12

Debt restructuring & equity infusion by

Government of India, first bond issuance,

funds by World Bank

Award of Mini Ratna status by Dept of Public Enterprises, GoI,

debt reduction, award of Navratna status, production crosses 400 million tonne


Exhibit 4: Overview of Coal India

Eastern Coalfields(100%)

Western Coalfields (100%)

South Eastern Coalfields (100%)

Bharat Coking Coal Limited (100%)

Northern Coalfields (100%)

Coal India Africa Limited (100%)

Mahanadi Coalfields (100%)

Central Coalfields Limited (100%)

MSJS Coal (60%)

MNH Shakti Ltd (70%)

Coal India

Central Mine Planning & Design Institute (100%)


Listing In November 2010, Coal India got listed on the domestic stock exchanges via an initial public offering (IPO). The company witnessed a dream listing wherein the offer price was | 245 while it got listed at | 291. In terms of size, it was one of the largest IPOs in the history of the domestic capital markets wherein | 15,200 crore was garnered by the government by divesting its 10% stake and was oversubscribed 15.2 times.

Exhibit 5: Glossary of important relevant terms

Term MeaningResource A coal resource must have the potential for eventual economic viability

ReserveA coal reserve is the economically mineable part of measured and indicated coal resources

Proved geological resource

It represents the resource base with the highest confidence. The material depicted inthe area is within a radius of 200 metre of boreholes taken up for exploration. Provedgeological reserves can be found only on the completion of detailed exploration

Indicated geological resource

It represents material occurring beyond a radius of 200 metre but within a radius of 1000 metre around the boreholes taken up for exploration

Inferred Geological ResourceIt represents material occurring beyond a radius of 1000 metre but within a radius of2000 metre around boreholes taken up for exploration

Extractable Coal ReservesIt is used to indicate the portion of a resource for which extraction is established to be technically & economically feasible through mining studies

Gross Calorific Value (GCV)It takes into account heat trapped in ash content alongside the heat value of carbon content

Useful Heat Value (UHV) It takes into account only the actual heat value contained

Overburden removal (OBR)

OBR is the provision being made by CIL in its P&L statement to account for the probable vagaries that may be encountered while mining coal. It depends on the stripping ratio witnessed during mining wherein if the stripping ratio witnessed is less than the projected stripping ratio then the provision for overburden removal will increase. If the stripping ratio witnessed is more than the projected ratio then the provisions made are less



Production Production grew at a CAGR of 4.4% in FY04-13 while in FY13 it was at 452 MT, up 3.7% YoY. For 10MFY14 the coal production came in at 367 MT.

Exhibit 6: Production trend

306 324 343 361 379 404 431 431 436 452367

0

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500

FY04

FY05

FY06

FY07

FY08

FY09

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FY11

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FY13

10M

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milli

on to

nne


Exhibit 7: Production bifurcation of coal types

24 24 26 27 36 41 43 44 38

319 337 353 377 395 390 392 409329

343

361

379

404

431

431

436

452

367

0

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06

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08

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10

FY20

11

FY20

12

FY20

13

10M

FY14

in m

illion

tonn

e

Coking Coal Non Coking Coal Total Production


Coking coal constitutes 9.7% of its total production in FY13 that came in at 452.2 MT. In FY13, coking coal production stood at 43.7 MT. The main coking coal producing subsidiaries are BCCL and CCL. Exhibit 8: Production bifurcation – Open cast vs. underground

259 277 298 318 336 360 388 391 397 414337

47 47 46 43 44 44 43 40 38 38 30

0

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FY05

FY06

FY07

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10M

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milli

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nne

Open cast Underground


The main coal producing mines are South Eastern Coalfields (SECL) (118.2 MT) and Mahanadi Coalfields (MCL) (107.9 MT), which constituted 27% and 24% of total production, respectively, in FY13. E (G9-G11) and F (G11-13) grade coal comprises the majority (66%) of coal supply from CIL. The average kcal/kg of coal supplied by CIL is ~3500-4000 kcal\kg

Exhibit 9: Subsidiary wise production (percentage share)

ECL7% BCCL

7%

CCL11%

NCL15%

WCL9%

SECL27%

MCL24%


Exhibit 10: Coal supply grade wise

Coking Coal, 9%

G (G13-14), 0%

F (G11-G13), 42%

E (G9-G11), 24%

D (G7-G9), 8%

C (G6-G7), 10%

B (G4-G5), 6%A (G1-G3), 1%


Underground production comprises ~8.4% of total production in

FY13 whereas open cast comprises ~91.6% of the total

production. In FY13, coal production from open cast mines

stood at 414 MT whereas coal production from underground

mines stood at 38 MT. South Eastern Coalfields, WCL and ECL

are subsidiaries that produce coal using underground mines

The company’s entire coking coal is not steel grade coking coal

that can be used by steel manufacturers. Instead, out of the

total 43.7 MT, only about ~8-9 MT is steel grade coking coal,

which can be used by steel manufacturers. From this, a majority is being offloaded by SAIL

CAGR 4.4% (FY04-13)

Rectangle


Sales Sales grew at a CAGR of 4.8% in FY04-13 to 465 MT in FY13. For 10MFY14, the coal sales came in at 386 MT

Exhibit 11: CIL sales trend

304 322 334 351 375 401 416 425 433465

386

050

100150200250300350400450500

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

10M

FY14

milli

on to

nne


Exhibit 12: Sales bifurcation trend

234 249

257

262 28

0 297

299

304

312 34

5

12 12 10 10 10 9 9 10 8 8

58 61 67 79 85 96 108

111

113

112

050

100150200250300350400

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

in m

illion

tonn

e

Power Utilities Steel / hard coke others

FY13 steel & others category sales are our estimates Source: Company, ICICIdirect.com Research

The power sector comprises the major share of overall sales volumes with its share in FY13 at 74.2%. The others portion of sales consists of the e-auction sales and coal supplied to independent power plants (IPP). Routes through which coal is supplied:- Fuel supply agreements (FSA): It is the commitment towards uninterrupted supply of coal. FSA constitutes ~82-85% of the total coal supplied by volume. E-auctions: Production quantity, which is left after supplying coal through FSA, is sold through e-auctions. This fetches greater realisations for the company and is as per the directive of Ministry of Coal. E-auctions constitute ~10% of the total coal supplied by volume.

Exhibit 13: Sales break-up by volume (FY13, 465 MT)

FSA, 397.2MT, 85%

e-auction, 49.1MT, 11%

feed to washeries, 17.6MT, 4%


Exhibit 14: Sales break-up by value (FY13, | 68203 crore)

FSA, 51571 crore, 76%

Washed Coal & Products,

4229 crore, 6%

E-Auction Sales, 12503 crore, 18%


By volume, in FY13, FSA constituted 85.4% of the entire offtake

whereas e-auction comprised 10.6%. The rest is constituted by

washeries to the tune of ~3.8%

By value, in FY13, FSAs constituted 75.5% whereas e-auction

comprised 18.3%. The balance consists of washed products to

the tune of 6.2%

CAGR 4.8% (FY04-13)

Rectangle


Investment Rationale Huge mineral resource base Coal India has a huge extractable reserve base (reserves of 18.2 billion tonne) and is well placed to cater to the rising domestic demand. Its extractable coal reserves can easily suffice for current production levels for the next 40 years (reserves: production at 40). Exhibit 15: Coal India reserves & resources (as on April 1, 2010) (million tonne)

Particulars

Proved Geological Resource

Indicated Geological Resource

Inferred Geological Resource

Total Geological Resource

Extractable Coal Reserves

Coalfields currently under productionKorba 3,896 1,605 51 5,552 2,670 Singrauli 3,270 212 - 3,482 1,891 Talcher 7,568 1,721 640 9,929 5,893 IB - Valley 3,242 161 - 3,403 2,119 Wardha Valley 2,249 614 58 2,921 795 Jharia 5,983 1,009 51 7,043 1,145 North Karanpura 4,458 35 - 4,493 2,072 Central India Coalfields 2,665 892 123 3,680 774 Raniganj 7,556 1,242 379 9,177 662 Rajmahal / Deogarh 1,378 382 579 2,339 546 East Bokaro 2,116 1,110 - 3,226 692 Wast Bokaro 1,516 236 10 1,762 462 Kamptee 817 121 - 938 214 Mand- Raigarh 1,957 114 - 2,071 659 Umrer Nand Bander 558 1 - 559 215 South Karanpura 1,550 196 7 1,753 308 Pench-Kanhan 693 199 44 936 148 Pathakhera 190 28 - 218 87 Makum 362 - - 362 239 Ramgarh 386 19 - 405 138 Giridih 18 - - 18 15 Coalfields currently not under productionDaltonganj 16 0 0 16 0Hutar 0 0 0 - 0Tatapani-Ramkola 97 387 0 484 0Dilli-Jeypore 4 14 0 18 10Total 52,545 10,298 1,942 64,785 21,754


The above mentioned resource & reserves figures are as per DHRP filed by the company at the time of listing in November 2010. However, the company in its latest presentation declared resources of 62.7 billion tonne (against 64.8 billion tonne declared earlier) and reserves of 18.2 billion tonne (against 21.8 billion tonne declared earlier) due to switch over to the globally accepted United Nations Framework Classifications (UNFC)

CIL has the largest reserve base among all its peer group companies in the world. Though the grade of coal mined by Coal India is of low calorific value, the same can very well be utilised by domestic power plants, thereby generating valuable thermal energy.

CIL has a huge resource base of ~64.8 billion tonne, with 52.5

billion tonne, 10.3 billion tonne and 1.9 billion tonne of proved,

indicated and inferred geological resources, respectively.

Exhibit 16: International Peers Reserves

S. No Company Base Country Reserves (million tonne)

1 Peabody Energy USA 9285

2 Arch Coal USA 5490

3 Adaro energy TBK pt Indonesia 1194

4 Bayan resources Indonesia 477

Coal India Ltd India 18200

Source: Company PPTs, ICICIdirect.com Research

Comparing its global peers CIL reserves at 18.2 billion tonne

are around twice the reserves of its largest peer Peabody Energy at 9.3 billion tonne


Government support to aid production growth going forward

After a couple of years of stagnant production levels in the past, CIL has finally delivered a decent performance with FY13 coal production coming in at 452.2 MT, up 3.7% YoY. For the 11 months ended FY14 the company’s production growth has been sluggish at mere 2.8%. However, In order to boost coal volumes the government has eased the environmental clearance norms for expanding capacities of existing coal mines. This is likely to help state-run CIL boost output, going forward, and ease the crippling fuel scarcity in the power sector. Going forward, we expect coal production at the company to grow at a CAGR of 4.0% in FY13-16E to 509 MT in FY16E.

Relaxation in norms to aid Coal India to increase output The Environment Ministry issued guidelines in December 2012 to grant environmental clearances to existing mine projects, which had already had a public hearing, subject to conditions for one-time capacity expansion of 25% within the same mine lease area. The capacity expansion comes with a cap of mining 2 MTPA of coal if mined coal is transported through road and 5 MTPA of coal if it is transported through rail.

Further, the Ministry of Coal has taken up the case for smaller coal mining projects with the MoEF wherein it has stated that the cap on capacity expansion up to 25% for such projects, as per the current guidelines, was inadequate and will yield negligible increase in production.

Consequently, in January 2014, the government has allowed expansion up to 50% in existing projects without any public hearing, under the environmental appraisal process. This relaxation is for coal mining projects with annual production capacity of less than 8 MTPA. This rule will help CIL to enhance output swiftly and also check for a delay in project development. It has been decided to allow one-time capacity expansion up to 50% or incremental production of up to 1 MTPA, whichever is higher. The ministry has also further clarified that the relaxation will not apply for projects having annual production of more than 8 MTPA. They would be allowed to expand up to 25% of capacity without mandatory public hearing as decided in December 2012.

Sets up CCI to expedite the decision making process CIL has also received approval from MoEF for 23 projects after intervention by the Cabinet Committee on Investment (CCI). The government set up the CCI to expedite the decision making process for clearance of projects in the infrastructure sector.

As on December 2013, out of the 20 projects pending with MoEF for environment clearance (EC), 16 proposals have been granted EC. Of the pending four projects awaiting environment approval, three belong to Western Coalfield (WCL) and one to South Eastern Coal Field (SECL).

In addition, two of the five projects have been granted stage-II forest clearance (FC) while five of the 15 proposals have been granted stage-I FC. Of the other projects awaiting stage – II FC, two belong to Central Coalfield (CCL) and one to SECL. Two projects of CCL, four of SECL and four of Central Mine Planning & Design Institute (CMPDIL) are yet to receive stage-I FC.

Production trend

361 379 404 431 431 436 452367

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One time environmental norms waiver conditions

Source: MoEF, ICICIdirect.com Research

Existing mining capacity (coal mine)

<= 8 MTPA > 8 MTPA

Expansion permitted up to 50% of existing capacity or 1 MTPA; whichever is higher

Expansion permitted up to 25% of existing capacity

Maximum of 2 MTPA if coal is transported through road

Maximum of 5 MTPA if coal is transported through rail


Introduction of mine-developer-operator approach Coal India is also planning to work through a mine-developer-operator (MDO) approach to step up production. Under this concept, the MDO will develop and operate the mine and be responsible for detailed designing, financing, procurement, construction, operations and maintenance of all infrastructures including coal washery, loading arrangements, etc. Further the MDO/participating company will facilitate possession of land and R&R activities, preparation and clearance of Environmental Impact Assessment (EIA), Environmental Management Plan (EMP) and forest clearance (FC). However, CIL will directly obtain approval of EMP and FC. The MDO, on the other hand, will be responsible for environment monitoring and management, reclamation and mine closure (progressive and final). All activities within the mine premises and till the loading of coal in rail wagons, according to agreed annual targets, will be the responsibility of the MDO. Within the MDO approach, the company plans to take up seven mines in the first phase and expand the horizon later, depending on results. We believe this MDO approach is likely to yield positive results over a medium to long term horizon. Exhibit 17: Subsidiary wise production targets (in MT)

Actual ProductionFY13 FY14E FY15E FY16E FY17E

ECL 33.9 34.5

BCCL 31.2 32.5

CCL 48.1 53.5

NCL 70 72.2

WCL 42.3 44

SECL 118.2 124.3

MCL 107.9 120

CMPDIL NA NA

CIL\NEC 0.6 1

Total 452.2 482 507 537

556

-

615

Production targetSubsidiary


Going forward, we expect the production to be ramped by its main coal producing subsidiaries namely SECL & MCL which operated at a capacity utilization of 80.5% & 75.6% respectively in FY13.

The company aims to produce 615 MT (upper end) in FY17

thereby witnessing cumulative annual growth rate (CAGR) of

8.0% in FY13-17E. Out of 615 MT, it proposes to produce

30.2% from its existing mines, 54.2% from projects under

implementation and 15.6% from new projects to be taken up

Exhibit 18: Coal Production Trend

431 436

452462

485

509

380

400

420

440

460

480

500

520

FY11 FY12 FY13 FY14E FY15E FY16E

milli

on to

nne

(MT)


CIL has proposed a capital outlay of | 25,400 crore in the

Twelfth Plan (2012-17) plus an ad hoc provision of | 35,000

crore for acquisition of assets abroad and development of a

new coal block in Mozambique

FY13-16E CAGR : 4%

For FY15E, the company has set the coal production & off-take target at 507 MT & 520 MT respectively


Competitive cost of production

CIL produces ~90% of its coal through open cast mining and witnesses low stripping ratio (1.8 during the nine months ended FY14), thereby ensuring that reserves are easily extractable. Hence, this helps to position the company as among the lowest cost coal producers in the world. Exhibit 19: Peer comparison

Company

Reserves (million tonne)

Production (million tonne)

Sales (million tonne)

R/P ratio

Realisation (US$ per

tonne)

EBITDA/tonne (US$ per

tonne)

CoP/tonne (US$ per

tonne)

Coal India Ltd 21754 452 465 47 23.7 5.3 18.4

Peabody Energy 9285 NA 252 NA 27.9 4.2 23.7

Bayan resources 476.9 14 15 35 78.0 8.0 70.0

Arch Coal 5490 NA 140 NA 20.9 3.1 17.8Z


Exhibit 20: Cost of production (adjusted for overburden removal)

753804

994 10111064 1098 1111

600

700

800

900

1000

1100

1200

FY10 FY11 FY12 FY13 FY14E FY15E FY16E

| pe

r ton

ne


Exhibit 21: Expenditure break-up

96 118 141 150 157 158

446

609 587 621 635.4 650.6

41

46 5050 52 52

31

7 1315 15 15

109

113 125146 150 152

53

51 5757 55 50

0

200

400

600

800

1000

1200

FY11 FY12 FY13 FY14E FY15E FY16E

| pe

r ton

ne

COGS Employee benefit expenses Power & Fuel ExpensesWelfare expenses Repairs Contractual ExpensesOther Expenses


The new wage agreement for non-executive employees of the coal industry was signed on January 31, 2012 and will apply retrospectively from June 30, 2011 with validity till June 30, 2016. The agreement envisages a 25% increase in gross wages of non-executive employees. The settlement of wage bill gives certainty to the company’s operations, going forward, and provides some cushion against any labour unrest

We have taken a modest hike of 7% in wage costs per year from FY14E to FY16E.

Employee cost comprises a massive ~60% of the entire expenses in mining coal. The other notable cost is that of power & fuel

One time wage settlement, prospectively

The cost of production in case of open cast mines is ~| 700-800 per tonne, which is in the lowest decile of the global cost curve and at almost one-fourth of underground mining cost of ~| 3000-4000 per tonne. CIL’s blended cost of production stands at ~| 1050/tonne (~US$18 /tonne).


Indian power demand scenario As of January 2014, out of the total installed power generation capacity of 234,602 MW, thermal coal based power generation capacity accounted for a massive 59% share with installed capacity at 138,903 MW.

Exhibit 22: Power generation installed capacity as of January 2014

MW % Share MW % Share MW % Share MW % Share MW % Share MW % Share MW % Share

Coal 76,049 53 77,649 52 84,198 53 93,918 54 112,022 56 130,221 58 138,903 59

Diesel 1202 1 1200 1 1,200 1 1,200 1 1,200 1 1,200 1 1,200 1

Gas 14,656 10 14,877 10 17,056 11 17,706 10 18,381 9 20,110 9 20,381 9

Thermal (MW) 91907 64 93726 63 102454 64 112,824 65 131,603 66 151,531 68 160,484 68

Hydel 35,909 25 36,878 25 36,863 23 37,567 22 38,990 20 39,491 18 39,875 17

Renewable 11,125 8 13,242 9 15,521 10 18,455 11 24,503 12 27,542 12 29,463 13

Nuclear 4,120 3 4,120 3 4,560 3 4,780 3 4,780 2 4,780 2 4,780 2

Total 143,061 147,966 159,398 173,626 199,877 223,344 234,602

Jan-14FY13FY 09 FY 10 FY11 FY12FY 08

Source

Source: Ministry of Power, ICICIdirect.com Research

Exhibit 23: Electricity generation (fuel type) January 2014 (MW)

Gas, 20381, 9%

DSL, 1200, 1%

Nuclear, 4780, 2%

Hydro, 39875, 17%

RES, 29463, 13%

Coal, 138903, 59%

Source: CEA, ICICIdirect.com Research RES – renewable energy

Thermal capacity upcoming in India The Planning Commission has set a target of 88,537 MW as the additional power capacity for the current Twelfth Five Year Plan ending March 2017 in the backdrop of the Eleventh Five Year Plan wherein the capacity addition was 67,548 MW (including approximately 17 GW renewable) against the target of 78,700 MW.

Exhibit 24: Power generating capacity (GW)

105 108 113 118 124 132 143 148 159 174200

223 235

288

050

100150200250300350

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Jan-

14

FY17

E

Source: Ministry of Power, ICICIdirect.com Research

Out of the planned 88,537 MW capacity, thermal (coal, gas) would make up 72,340 MW while hydro would account for 10,897 MW and nuclear power the remaining 5300 MW.

With increasing capacity addition planned in the Twelfth Plan Year period, there exists unquenchable demand for coal, which bodes well for Coal India. It is envisaged that coal demand will reach ~980 MT by FY17E out of which CIL is expected to supply ~615 MT (63%)


Fuel supply agreement CIL’s fuel supply agreement (FSA) can be broadly categorised into:-

a) FSA with power producers (utilities, private and independent) b) FSA with non-power producers c) FSA with state nominated agencies

New FSA regime CIL has modified the FSAs to be signed with power companies. As per new FSA norms, for power plants commissioned post 2009 CIL will supply 80% of the annual contracted quantity (ACQ). Considering the limitation of producing coal CIL has formulated the FSA such that out of 80% of ACQ, 65% will be supplied through CIL’s own coal fields while the balance 15% will be supplied through imports. The imports are not the prerogative of Coal India and the power producer with whom the FSA has been signed has the right to import themselves, through any third-party or through Coal India, the proportion of which will, however, be registered as deemed delivered. It has been proposed that imported coal be supplied on a cost plus basis i.e. cost of imported coal plus any additional charges incurred by CIL and a service charge to CIL. The quantity supplied by CIL will gradually increase from 65% of ACQ till FY15 to 67% of ACQ by FY16 and further to 75% of ACQ from FY16 onwards. The consequent composition of imported coal is to be reduced from 15% till FY15 to 10% in FY16 and further to 5% from FY16 onwards. CIL currently supplies 90% of ACQ to power plants commissioned before 2009 and will continue to do so in future as well. Exhibit 25: New penalty methodology delivery/lifting of coal in a year(% of ACQ) Upto FY2015 FY2016 FY 2016 onwards

80-100 0 0 075-80 1.570-75 565-70 5 1060-65 5 10 2055-60 10 20 4050-55 20 40 40<50 40 40 40

% penalty for the failed quantity (@ Wt. avg of base prices of grades of coal supplied)

1.51.5


Even though the new penalty clause does provide marginally higher degree of comfort to power companies with respect to supply of coal, provisions such as deemed delivery, force majeure as well as even railway failure (Railways not allotting wagons or not placing wagons for loading) would be considered before computing level of delivery, acting as a safety net from potential levy of penalties. The company is also entitled to performance incentive for delivery in excess of 90%, which is as follows:- Exhibit 26: Performance incentive

% of actual deliveries% incentive (@ Wt. avg of base prices of grades of coal supplied)

90-95 1095-100 20>100 40


We believe the finalisation of the penalty clause provides visibility over CIL’s production and offtake volumes, going forward. The proposed penalty structure is a mechanism, which is not adverse for CIL while, at the same time, providing comfort of fuel security to its customers.

The penalty on shortfall quantity is to be calculated on an incremental shortfall basis (methodology same as income tax calculation) with penalty rate within each slab varying on a linear basis depending on the shortfall percentage


E-auction It is the route through which CIL realises its best margins but does not enjoy autonomy over the same. The quantity of coal to be offered by the e-auction route is as per the directive of Ministry of Coal (MoC). The company does not have the relevant authority to decide on the same though it is reviewed from time to time by the MoC.

Exhibit 27: Sales type (volume) bifurcation

91.9 87.1 88.4 89.0 88.5 89.5 88.3 89.9 90.7

10.5 11.7 10.1 9.311.511.08.1 11.612.9

020406080

100

FY20

08

FY20

09

FY20

10

FY20

11

FY20

12

FY20

13

FY20

14E

FY20

15E

FY20

16E

%

FSA E-auction


Exhibit 28: E-auction realisations

1347 1481 15831846

2599 25442216 2306 2220

0

500

1000

1500

2000

2500

3000

FY20

08

FY20

09

FY20

10

FY20

11

FY20

12

FY20

13

FY20

14E

FY20

15E

FY20

16E

(|/to

nne)

Source: ICICIdirect.com Research

Any upside in e-auction sales bodes well for the company. However, we remain cautious in this regard and have made conservative estimates for e-auction sales volume to the tune of 50 MT in FY15E and 48 MT in FY16E. On the back of downward trending international coal prices, we also expect e-auction sales to fetch lower realisations, going forward. We expect e-auction realisations to decline at a CAGR of 4.4% in FY13-16E to | 2220/tonne in FY16E (FY13: | 2544/tonne).

Beneficiation of coal India’s coal reserves are of low quality with high moisture and ash content, which has greater tendency to pollute the environment making coal washing increasingly important. Moreover, the company can realise better margins if it increases its coal beneficiation capabilities as the additional costs incurred in coal beneficiation are lower than the incremental price realised by selling the same. Exhibit 29: Current beneficiation capacity

Particulars Number Capacity (MT) Number Capacity (MT)Coking coal washeries 12 22.18 14 92Non coking coal 5 17.22 6 19.1Total operational washeries 17 39.4 20 111.1

Existing Expansion planned


The company has also proposed that all new open cast mining projects with coal production capacities greater than 2.5 MTPA not linked to pit head customers will be equipped with dedicated beneficiation facilities. The company proposes to start 20 new washeries with an additional capacity of 111.1 MT (six coking coal- 19.1 MT and 14 non-coking coal – 92 MT) and has finalised the tender for four washeries with a total capacity of 22.5 MT. CIL expects to commission two coal washeries by the end of FY14/earlier FY15. Going forward, we expect total washed coal sales to grow at a CAGR of 4.5% in FY13-16E to 16 MT in FY16E.

Beneficiated coal forms a mere ~3-4% of the entire sales volume. Beneficiated coal sales in FY13 stood at 14.07 MT out of the total coal sales of 465 MT. In terms of value, beneficiated coal constitutes ~5-7% of the entire topline


Improved availability of rail rakes to support sales growth Railway rakes form the majority medium of transport of coal from CIL’s coalfields to power plants. In FY13, 54% of the entire sales volume (offtake) was transported through railway rakes with the rest being transported through merry-go-round (MGR, 19%) rails and road (25%). Therefore, availability of rakes is an importance parameter determining the coal off take from CIL.

Exhibit 30: Transportation sources bifurcation

50 52 51 48 47 51 53 54

24 23 22 21 21 20 18 19

22 22 24 28 30 27 26 25

0

20

40

60

80

100

120

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

FY20

12

FY20

13

%

Rail MGR Road


Exhibit 31: Rake mathematics

Particulars Units FY11 FY12 FY13

Daily rake availability No 162.4 169.2 187.0

Tonnage per rake tonne 3652 3710 3710

Per day offtake MT 0.59 0.63 0.69

Yearly offtake (Rail) MT 216.5 229.1 253.2

Total yearly offtake MT 424.5 433.1 465.18

Share of total sales % 51 53 54 Per Day off-take= Daily rake availability x tonnage per rake

Yearly off-take= Per day off take x 365


Availability of rakes has improved notably over the last couple of years with average rake availability increasing from 162 rakes/day in FY11 to 169 rakes/day in FY12 and further to 187 rakes/day in FY13, thereby helping CIL liquidate its inventory and increase the coal offtake from its mines. We expect rake availability to improve, going forward, on the back of (i) the central government’s thrust to increase rake supply & (ii) CIL’s novice venture to build the new rail network in the country.

Recently announced SPV; profound step to increase offtake! CIL recently announced it will float a special purpose vehicle (SPV) to build a 180-km rail network for evacuating untapped coal in Chhattisgarh. In the proposed SPV, CIL will fund | 2880 crore (64%) in the total capex of | 4500 crore and is expected to recover the same over time by levying a user charge to its customer. CIL will hold 64% in the said SPV, the rest being shared between Ircon (Indian Railways entity) and the Chhattisgarh government. The present move is part of a much broader plan wherein CIL envisages producing and supplying additional 300 MT of coal by laying a 300 km rail network. Recently, the Cabinet Committee of Investments (CCI) has granted approvals for the three key railway projects; Tori-Shivpur-Kathautia (Hazaribagh) triple line for the North Karanpura Coalfield in Jharkhand, Jharsuguda-Barpalli double line for IB Valley coalfield in Orissa and Bhupdeopur-Raigur-Mand in Chhattisgarh, which were stalled for nearly a decade due to various reasons.

Coal regulator; to have minimal impact Recently, the Central government has set up a Coal Regulator Authority (CRA), under the administrative control of the ministry of coal. Prima facie the role of the regulator is likely to be restricted to that of an advisory body, laying down broader principles & methodologies for coal price determination, procedure for automatic coal sampling among others. On the pricing front, CIL would retain the final authority for fixing coal prices, subject to the coal ministry’s approval. Though CIL retaining final authority on coal prices is a key positive for the company, allaying investor worries.


Coal pricing Coal India’s realisations are at a discount to global prices partly due to low calorific value and partly on account of the central government’s directive to sell coal at low prices. Majority of its total coal sales is being sold at a price that is ~50% lower than global prices (on an energy adjusted basis). Hence, on account of the steep discount, CIL’s realisations are largely insulated from a swing in global coal prices.

Exhibit 32: Selling price product wise

12352599

1403

6461

13352228

14432544

1436

5701

14622300

147212782200

1394

5067

1699 231714201298

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FSA E-Auction Blended Raw Coal Washed CokingCoal

Washed NonCoking Coal

Blended WashingCoal

Blended Overall

| pe

r ton

ne

FY12 FY13 9MFY14


Since January 31, 2012 the company has shifted to a gross calorific value (GCV) pricing mechanism replacing useful heat value (UHV) pricing mechanism though its implementation will be done in phases. The GCV system will replace the existing seven grades (A-G) with 17 bands of calorific values with a bandwidth of 300 kilo calorie.

Exhibit 33: Coal India pricing

Grade

Power utilities (including IPPs),

fertiliser & defence sector other users

Power utilities (including IPPs),

fertiliser & defence sector other users

Kcal/kg | per tonne | per tonne | per tonne | per tonne

>7000 G 1 * * * *

6700 - 7000 G 2 4870 4870 4870 4870

6400 - 6700 G 3 3890 3890 3890 3890

6100 - 6400 G 4 3490 3490 3490 3490

5800 - 6100 G 5 2800 2800 2800 2800

5500 - 5800 G 6 1600 2150 1920 2590

5200 - 5500 G 7 1400 1890 1680 2270

4900 - 5200 G 8 1250 1690 1510 2030

4600 - 4900 G 9 970 1310 1170 1570

4300 - 4600 G 10 860 1160 1030 1390

4000 - 4300 G 11 700 950 840 1150

3700 - 4000 G 12 660 890 800 1070

3400 - 3700 G 13 610 820 730 980

3100 - 3400 G 14 550 740 670 890

2800 - 3100 G 15 510 680 610 820

2500 - 2800 G 16 450 610 550 730

2200 - 2500 G 17 400 540 480 640

* For GCV exceeding 7000 kcal\kg, the price shall be | 150/- per 100 kcal\kg over & above the price of

6700-7000 Kcal\kg band

Pithead run of mine price for non-coking coal (Dec 16, 2013). WCL

Pithead run of mine price for non-coking coal (May 27, 2013), CIL excl WCL

GCV Bands


As per our analysis, the present move from UHV to GCV has resulted in a blended increase in realisations of ~4-6% for CIL


Recently, at the time of announcement of its FY13 results, CIL went for a price increase on FSA supplied coal due to rising fuel costs and rise in contractual labour expenses. The company has taken a 10% hike in coal prices for coal with GCV ranging from 2200-6000 kcal (for Grade G5-G17) and 12% reduction for coal with GCV ranging from 6100-6700 kcal (for Grade G3-G4). This cumulates into an average price hike of 4.8% effective from June 2013.

Supply at non-subsidised rate (thermal coal) to non power companies The CIL board has objected to the supply of subsidised thermal coal to non-power industries (metals and cement), the end product prices of which are not administered by the Government of India (GoI). CIL currently sells coal to metal and cement manufacturers at a mark up of ~30% as compared to the price at which it sells coal to power companies. Therefore, there exists significant room for price increase, between the FSA price for non-power players and e-auction price paid by others. There exists a possibility wherein steel and cement manufacturers will have to buy coal in e-auction and end their linkages, thereby resulting in incremental EBITDA for CIL, which could positively affect our target price. If this were to happen then it could result in an increase in our target price to the tune of ~| 6/share. Being conservative, we await clarity on the issue and have not used the same in our target price calculation. Trimming workforce, increasing man-power efficiency CIL has been gradually reducing its work force by offering lucrative VRS schemes for its employees. This, in turn, has helped the company to increase the productivity per employee.

Exhibit 34: International pricing trend

73.161.042.2

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Apr-1

0Ju

n-10

Aug-

10Oc

t-10

Dec-

10Fe

b-11

Apr-1

1Ju

n-11

Aug-

11Oc

t-11

Dec-

11Fe

b-12

Apr-1

2Ju

n-12

Aug-

12Oc

t-12

Dec-

12Fe

b-13

Apr-1

3Ju

n-13

Aug-

13Oc

t-13

Dec-

13Fe

b-14

US$/

tonn

e

NewCastle 6000 Kcal Indonesia 5400 Kcal Indonesia 4200 Kcal

Source: Bloomberg,ICICIdirect.com Research

The average coal output of 527 tonne per employee in FY02 has increased to 1240 tonne per employee in FY13. The current employee strength of Coal India as of January 2014 is 3,48,713 employees

Exhibit 35: International pricing trend

5309

87

5106

71

4930

61

4765

77

4603

69

4458

15

4327

10

4192

14

4047

44

3902

43

3774

47

3647

36

527 569 621 679 746 810 877 9631066 1105 1155 1240

0

200000

400000

600000

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

No

0

500

1000

1500

tonn

e

Average Man Power

Average output per man per year

Source: Bloomberg,ICICIdirect.com Research

The current freight rate from South Africa to India’s west coast is ~US$16.5/tonne (US$17.0/tonne for the east coast) while that from Indonesia to India’s west cost is ~US$11/tonne (US$9.5/tonne for the east coast)


Financials Modest revenue growth in FY13-16E aided by higher sales volume We expect CIL to clock modest revenue growth of 4.1% CAGR in FY13-16E primarily on the back of an increase in coal sales volume at a CAGR of 3.7% in FY13-16E and flat blended realisations. We have modelled coal sales volume of 471 MT in FY14E (CIL’s target 492 MT), 496 in FY15E (CIL’s target 520 MT) and 518 MT in FY16E. We expect blended realisations to drop from | 1472/tonne in FY13 to | 1434/tonne in FY14E on the back of subdued e-auction coal realisations and expect coal grade slippages to finally stabilise around | 1488/tonne in FY16E.

Exhibit 36: Revenue growth

62,41568,303 68,008

72,69577,088

0

20,000

40,000

60,000

80,000

FY12 FY13 FY14E FY15E FY16E

| cr

ore


Exhibit 37: Coal sales volume & blended realisation

433464 471

496518

1441

1472 1467

1488

1434

380400420440460480500520540

FY12 FY13 FY14E FY15E FY16Em

illion

tonn

e (M

T)1400

1420

1440

1460

1480

1500

| pe

r ton

ne

Sales Blended Realizations


The bifurcation of coal supply can be explained using the table below:

For power plants commissioned post 2009, the company has received a presidential directive for coal supply to power capacities of 78000 MW. We, however, have abstained from using it in our coal supply calculations as the CIL management expects the upper limit of power plants commissioning by FY16-17 at 60,000 MW of power capacity only. Considering the increasing thrust for supplying coal to the power sector under FSA route, we also expect a modest reduction of e-auction sales volume (50 MT in FY15E & 48 MT in FY16E), going forward.

Exhibit 38: Coal supply bifurcation Particulars 2013 2014E 2015E 2016E

Units Commissioned by March 2009 (MW) 67370 67370 67370 67370

Committed quantity as of March 2009 FSAs (MTPA) 305 306 306 306Annual contracted quantity ACQ (%) 90 90 90 90

Actual Supply (MTPA) (Power) 274 275 275 275

Committed quantity to Non-power sector 107 107 107 107

Actual Supply (%) 60 60 60 60

Actual Supply (MTPA) (Non-Power) 64 64 64 64

Total Supply through old FSA 339 340 340 340Estimated E-Auction Qty 49 55 50 48I-Direct Coal Supply Estimates 464 474 496 518Coal available for new FSA's 76 80 106 130


FY13-16E CAGR: 4.1%

CIL will continue to supply coal to the extent of 90% of ACQ for power plants commissioned before March 2009 (power capacity of 67370 MW). It will result in total offtake of ~275 MT of coal from these power plants, going forward, in FY14E, FY15E and FY16E For non-power sector, CIL only meets ~60% of their requirement (107 MT) resulting in total offtake of ~64 MT of coal from these non-power customers

For power plants commissioned after March 2009, CIL needs to meet only 80% of ACQ (coal requirement) of these power plants, which includes 65% of its own supply and 15% through coal imports till FY15. In FY16E, however, these power plants need to be supplied with domestic coal supplies comprising 67% with coal imports constituting 10%


The company’s e-auction coal sales realisations always came in at a discount to the landed costs of imported coal (average of ~25% in the last 11 quarters). Therefore, continuing the trend we have taken a discount of 25% to landed costs of imported coal in FY15E & FY16E, thereby assuming international coal price in FY15E & FY16E at US$57.5/tonne & US$55/tonne, respectively, for 5000 kcal Indonesian coal (price as of March 2014 at US$59.1). We have also assumed transportation & port charges at US$10 and currency assumption of US$: INR: 58 in FY15E and FY16E each.

We expect e-auction realisations to remain subdued on the back of muted global coal demand. We expect e-auction realisations to decline at a CAGR of 4.4% from | 2544/ tonne in FY13 to | 2200/tonne in FY16E.

Exhibit 39: Assumptions

Particulars Units FY11 FY12 FY13 FY14E FY15E FY16EFY13-16E

CAGRTotal Production MT 431 436 452 462 485 509 4.0%Raw Coal SalesFSA Sales MT 356 362 397 402 431 454 4.5%E-Auction Sales MT 48 51 49 55 50 48 -0.8%Total Raw Sales MT 404 413 446 457 481 502 4.0%Washed Coal Sales Washed Coal ( Coking) MT 3 3 3 2 3 3 -2.5%Washed Coal ( Non- Coking) MT 12 14 11 11 12 14 6.5%Total Washed Coal Sales MT 15 17 14 13 15 16 4.8%

Total Sales MT 423 433 464 471 496 518 3.7%

FSA Realizations | per tonne 1049 1235 1298 1290 1338 1378 2.0%E-auction Realization | per tonne 1846 2599 2544 2216 2306 2220 -4.4%Blended Raw Coal Realization | per tonne 1143 1403 1436 1401 1439 1459 0.5%Washed Coal (Coking) Realization | per tonne 5693 6461 5701 5050 5104 5336 -2.2%Washed Coal (Non-Coking) Realization | per tonne 1330 1335 1462 1741 1793 1847 8.1%Total Blended Realization | per tonne 1183 1441 1472 1434 1467 1488 0.4%

EBITDA per tonne | 317 362 389 304 302 310 -7.3%Yield on Bank Deposits % 6.3 9.7 9.7 9.0 9.5 9.3


Exhibit 40: E-auction realisation trend

0.66

0.59 0.

75

0.59

0.56

0.57

0.57

0.58

0.59

0.57

0.90

0.81

0.77 0.81

0.82 0.85

0.84

0.83

0.78

0.75

27 28 27

32 3330

25 2532

2

0.000.100.200.300.400.500.600.700.800.901.00

Q1FY

13

Q2FY

13

Q3FY

13

Q4FY

13

Q1FY

14

Q2FY

14

Q3FY

14

Q4FY

14E

FY15

E

FY16

E

|/kc

al

0

5

10

15

20

25

30

35%

Coal India Energy Adjusted Price Landed Cost of International Coal % Discount


At the beginning of FY14 (in May 2013), CIL had increased the price of coal supplied through FSA route. However the same was not reflected in subsequent quarters due to one time sell-off of obsolete inventory in Q2FY14 and coal grade slippages in Q3FY14 (92.5% grade compliance vis-à-vis 95% in FY13). Consequently, we expect the FSA realisations to decrease in FY14E to | 1290/tonne from | 1298/tonne in FY13 However, witnessing the pressure on margins on account of higher employee costs & other overheads, the company increased the price of coal supplied by its subsidiary (WCL) and also increased the coal sizing & loading charges in December 2013. Consequently, we expect FSA realisations to improve at a CAGR of 2.0% in FY13-16E to | 1378/tonne in FY16E


EBITDA to remain muted; margins to sustain at ~20%, going forward We expect EBITDA margins and corresponding EBITDA/tonne to remain subdued, going forward, on the back of a decline in e-auction sales volume and realisations. On an absolute basis, EBITDA is expected to de-grow at a CAGR of 3.9% in FY13-16E primarily on the back of subdued e-auction coal realisations (CAGR drop of 4.9% in FY13-16E). This, however, will get cushioned to some extent by the growth in total coal sales volume (growth at 3.7% CAGR in FY13-16E). EBITDA margins are also expected to decline from 26.5% in FY13E to ~21% in FY15E and FY16E.

Exhibit 41: EBITDA margins trend

15,6

67.8

18,0

83.6

14,4

12.9

14,9

59.4

16,0

53.2

25.1 26.5

21.2 20.6 20.8

-

5,000

10,000

15,000

20,000


| cr

ore

0

5

10

15

20

25

30

%

EBITDA EBITDA Margin


Exhibit 42: …corresponding EBITDA/tonne

1183

1441 1468 1434 1467 1488

317 362 389304 302 310

0200400600800

1000120014001600

FY11 FY12 FY13 FY14E FY15E FY16E|

per t

onne

Realization EBITDA/tonne


PAT to remain subdued, although dividend payout to remain healthy!! We expect CIL’s PAT to de-grow at 3.2% CAGR in FY13-16E on the back of subdued EBITDA and, at the same time, a decline in other income yield. We expect the company to realise a pre-tax yield of 9.5% and 9.25% on its liquid assets in FY15E and FY16E, respectively.

Exhibit 43: PAT & PAT margins trend

14,7

88

17,3

56

14,0

61

14,5

51

15,7

36

23.725.4

20.7 20.0 20.4

-

5,000

10,000

15,000

20,000


| cr

ore

-

5

10

15

20

25

30

%

PAT PAT Margins


Exhibit 44: Healthy dividend payout to continue

23.4 27

.5

22.3

23.0

24.9

10.0 14

.0

29.0

12.0

12.0

50.9

130.3

48.252.142.7

0

5

10

15

20

25

30

35


| pe

r sha

re

0

20

40

60

80

100

120

140

%

EPS DPS Payout Ratio


CIL has gradually increased the dividend payout from 23% in FY11 to 51% in FY13. In FY14E, however, at the behest of the central government the company has given a one-time special dividend amounting to | 29/share. We believe the dividend payout will remain healthy, going forward, as the company possesses surplus cash on its books with modest capex requirements and generates good free cash flows (~| 14000 per year). We expect the payout to be ~52% (dividend per share | 12) in FY15E and 48% (dividend per share | 12) in FY16E.

The company has been impacted by the deregulation of diesel prices for bulk customers (January 2013), which will result in greater cost of materials consumed, going forward.

The company has increased the wages of its contractual labour towards the end of FY13. On a full year basis, it should lead to an increase in contractual expenses to the tune of ~| 1000 crore in FY14E


Stable RoCE and RoE ratios The company witnessed healthy return ratios with RoCE and RoE in FY13 at 35.8% and 32.3%, respectively. Going forward, we expect CIL to report slightly subdued return ratios on the back of a large equity base with surplus cash & cash equivalents.

Valuation We have modelled coal sales volume growth at a CAGR of 3.7% in FY13-16E with consequent coal sales at 471 MT in FY14E, 496 MT in FY15E and 518 MT in FY16E. During FY13-16E, we expect the topline to grow at a CAGR of 4.1% with EBITDA and PAT de-growing at 3.9% and 3.2%, respectively. CIL has a strong balance sheet with robust cash flow and healthy liquidity position. We have valued the stock at 6.5x FY16E adjusted EV/EBITDA, thereby valuing the company at its international peers’ average FY16E EV/EBITDA of 6.5x and arrived at a target price of | 320. A healthy dividend payout and impressive dividend yield (~4.3% on a normalised basis) reiterate our positive stance on the company.

Going forward, RoCE and RoE are on a declining trend on the

back of huge cash reserves, which tend to swell the equity base

Exhibit 45: Return ratios – to remain stable albeit with slight declining trajectory

32.6

36.6

25.427.029.432.3

35.8 34.231.1 29.3

0

10

20

30

40

FY12 FY13 FY14E FY15E FY16Ein

%RoCE RoE


Exhibit 46: EV/EBITDA valuation

Particulars

FY16E EBITDA (|Crore), A 16,053

OBR adjustment (| crore), B 3,463

FY16 adjusted EBITDA (| crore), C=A+B 19,516

Peer average multiple, D 6.5

Enterprise value (| crore), E= C*D 126,855

Net Cash & cash equivalent (| crore), F 75,509

Implied equity (| crore), G=E+F 202,364

No of shares (crore) , H 631.6

Target price (|), G/H 320



Peer comparison

Coal India can be compared to its international peers that include the pure play coal miners namely Peabody Energy (US), Arch Coal (US), Bayan Resources (Indonesia) & Adaro Energy (Indonesia).

Exhibit 47: Coal India vis-à-vis global peers

2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016

1 China Shenhua China 45506 57239 4.2 4.2 4.0 NA 6.3 6.2 6.0 NA 1.0 0.9 0.8 NA 15.8 14.6 13.5 NA

2 Adaro Energy Indonesia 2751 4782 6.3 5.4 4.7 4.8 12.3 9.6 8.6 8.6 1.1 1.0 0.9 0.8 8.8 9.5 11.1 11.5

3 Peabody Energy US 4352 9949 10.6 10.0 7.0 6.0 NA NA 20.7 11.1 1.4 1.1 1.1 1.0 -11.9 0.4 5.0 9.7

4 Arch Coal US 996 4988 20.9 15.4 9.4 8.7 NA NA NA NA 0.4 0.5 0.6 0.6 -25.1 -17.8 -15.5 -13.9

Peer Average 10.5 8.8 6.3 6.5 9.3 7.9 11.8 9.8 1.0 0.9 0.8 0.8 -3.1 1.7 3.5 2.4

Coal India Ltd India 28687 18174 5.5 7.0 6.2 5.4 10.4 12.8 12.4 11.5 3.7 4.4 3.9 3.4 35.8 34.2 31.1 29.3

RoE (%)P/B (X)P/adj EPS (X)EV/EBITDAMarket cap EVS.No Company

Base country

Source: Bloomberg ICICIdirect.com Research For all companies Market Cap & EV are in US$ Million

Average trading multiples

Exhibit 48: 1 year forward EV/EBITDA (EBITDA adjusted for OBR)

50000

100000

150000

200000

250000

Nov

-10

Mar

-11

Jul-1

1

Nov

-11

Mar

-12

Jul-1

2

Nov

-12

Mar

-13

Jul-1

3

Nov

-13

Mar

-14

| cr

ore

EV 6x 7x 8x 10x


Exhibit 49: 1 year forward avg EV/EBITDA (EBITDA adjusted for OBR)

6.2

7.6

4

6

8

10

12

Nov

-10

Feb-

11

May

-11

Aug-

11

Nov

-11

Feb-

12

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Nov

-13

Feb-

14

x

EV/EBITDA Average


Exhibit 50: 2 year forward EV/EBITDA (EBITDA adjusted for OBR)

50000

100000

150000

200000

250000

Nov

-10

Mar

-11

Jul-1

1

Nov

-11

Mar

-12

Jul-1

2

Nov

-12

Mar

-13

Jul-1

3

Nov

-13

Mar

-14

| cr

ore

EV 6x 7x 8x 10x


Exhibit 51: 2 year forward avg EV/EBITDA (EBITDA adjusted for OBR)

5.4

7.5

4

6

8

10

12

Nov

-10

Feb-

11

May

-11

Aug-

11

Nov

-11

Feb-

12

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Nov

-13

Feb-

14

x

EV/EBITDA Average


Rectangle


Key Concerns Coal Ministry’s directive to sign 78000 MW Under the direction of Ministry of Coal, the board of directors of Coal India has approved signing of FSA for power capacities of 78000 MW (commissioned post 2009 till 2015). We have refrained from deriving coal demand from the aforesaid power capacities as we believe there will be a considerable delay in commissioning of the same. However, if we were to consider the additional 18000 MW (we have assumed FSA coal supply to capacities amounting to 60078 MW in FY15) it would have led to additional coal demand of ~80-85 MT from CIL. Since CIL is already falling short of the coal supply, this additional demand at worst would lead to additional penalties, which would negatively impact our target price.

Environment clearance A large number of CIL’s proposals are awaiting environmental clearances and are stuck at various stages of the approval process. We believe CIL will be granted the necessary approvals as a lot is at stake considering the investments made in the infrastructure sector including power & steel and the banking sector exposure to it.

Pricing issues Though the pricing of coal was completely deregulated with effect from January 1, 2000, still Coal India has to follow the government directive for deciding coal pricing. It is not yet open to the market forces of supply & demand. Since CIL sells its coal at a substantial discount to the equivalent price in international prices, hence, any severe correction in coal price coupled with appreciation of the rupee may hit its profitability. As per the current import policy (open general license), coal is allowed to be freely imported in the country.

E-auction volume may be sacrificed to fulfil FSA commitments

There exists a possibility that Coal India may be asked to sacrifice its e-auction sales and supply the same to domestic power plants to increase the electricity generation in our country. This will have a detrimental effect on our target price calculation wherein we may witness a price drop of ~| 1/share for each million tonne of diversion of e-auction coal sales volume (FY16E) to power producers under fuel supply agreements.

Renewable energy The thrust given by the central government and the need in response to climate change make it almost imperative to make additional capacity additions only in the renewable energy space. However, the corpus of investment and the gestation period involved in doing so limits the capacity additions envisaged, going forward. Exhibit 52: Comparison among sources of energy

Power sourcesRaw material COP

|/ unit Capex per MW*Gestation period

(in years) Remarks

Thermal (power) 0.6-2 | 4-5 crore 4-5 years DesiredThermal (gas) 1.7-4.4 | 3.5-4 crore 3-4 years Gas availability an issue

Hydro NA | 6-7 crore >5 years Seasonal in nature

Wind energy NA | 5-6 crore 1-1.5 years Seasonal in nature

Solar energy NA | 6-7 crore 1-1.5 years Seasonal in nature

* Figures are approximate, actual figures vary from project to project


Comparing the costs and investments incurred, we believe the cost of production of thermal energy using coal is the lowest among all other sources of energy.


Naxal attacks The company’s operations may get affected due its operations in Naxal hit areas, which includes Jharkhand, Chhattisgarh, Odisha and Assam.

Underground mining

The gradual shift in the company’s mining from open pit to underground will results in greater CoP. However, the same is to be weighed against the incremental (better) quality of coal that it will be able to produce, the realisation of which, we believe, should easily compensate for the same. Henceforth, any shift in mining operations i.e. from open cast to underground is expected to have an impact on the company’s margins. However, whether the impact will be positive or negative cannot be ascertained at this point of time.

Logistics issues may impact coal volumes Higher the numbers of rakes, better the offtake and, hence, enhanced earnings for CIL. The inability of railways to supply the same will hamper earnings, going forward.

Increase in account receivables; coal grade compliance issues In FY13, there was an unprecedented increase in account receivables on the books of CIL on account of its customers withholding their payments due to non-compliance of coal grade supplied by CIL. The majority of the dues are pending with NTPC, which is also its largest customer. We believe the matter is under arbitration and CIL is discussing this with its customers. However, there exists a possibility wherein both parties reach a solution and CIL agrees to settle the case at an amount, which is less than the current outstanding. In such a case, the difference is expected to be charged to the company’s P&L, thereby adversely impacting the profitability (there will not be any cash losses as cash is already being withheld).

CCI levying penalty for abuse of dominance In December 2013, the Competition Commission of India (CCI) found CIL abusing its dominance position and slapped a penalty of | 1773 crore. The penalty was levied against the complaint filed by Maharashtra State Power Generation Company and Gujarat State Electricity Corporation against CIL and its three subsidiaries: MCL, WCL and SECL for abuse of dominance by CIL. Consequently, post imposition of penalty, CIL appealed against the order at the appellate tribunal, which has stayed the CCI order with CIL submitting the requisite | 50 crore as a token penalty. The tribunal will further study the case and hear arguments from both parties before giving its judgment. We feel CIL did not abuse its dominant position in the domestic market. However, if such a case is found valid, it will set a wrong precedent and open the company to further litigation from other power producers (CIL’s customers).


Financial Scorecard (Consolidated) Exhibit 53: Profit and Loss (| Crore)

(Year-end March) FY12 FY13 FY14E FY15E FY16ENet Sales 62,415.4 68,302.7 68,007.8 72,695.4 77,087.6 Other Operating Income - - - - - Total Operating Income 62,415.4 68,302.7 68,007.8 72,695.4 77,087.6

- - - - - - Raw Materials Consumed 5,504.1 6,062.1 6,191.6 7,782.3 8,184.3 Employee Expenses 26,387.4 27,320.8 29,433.2 31,493.6 33,698.1 Welfare expenses 317.6 622.4 695.0 743.5 777.0 Repairs 645.7 822.4 862.2 892.2 932.4 Contractual Expenses 4,901.0 5,802.0 6,935.2 7,435.3 7,873.5 Overburden removal adjustment 3,693.9 3,201.7 3,140.9 3,298.0 3,462.9 Power & Fuel 2,012.5 2,333.5 2,372.8 2,577.6 2,693.6 Total Operating Expenditure 46,747.6 50,219.1 53,594.8 57,736.0 61,034.4

EBITDA 15,667.8 18,083.6 14,412.9 14,959.4 16,053.2 Interest 54.0 45.2 33.4 36.7 40.4 Other Income 7,536.9 8,746.7 8,529.2 8,713.2 9,580.0 PBDT 23,150.7 26,785.2 22,908.8 23,635.8 25,592.8 Depreciation 1,969.2 1,813.0 1,846.9 1,917.5 2,105.6 PBT 21,267.2 24,979.0 21,028.2 21,718.4 23,487.2 Total Tax 6,479.0 7,622.7 6,967.1 7,167.1 7,750.8 PAT 14,788.2 17,356.4 14,061.1 14,551.3 15,736.4 EPS 23.4 27.5 22.3 23.0 24.9


Exhibit 54: Balance sheet (| Crore)

(Year-end March) FY12 FY13 FY14E FY15E FY16EEquity Capital 6,316.4 6,316.4 6,316.4 6,316.4 6,316.4 Reserve and Surplus 34,136.7 42,155.6 34,773.3 40,456.4 47,324.7 Total Shareholders funds 40,453.1 48,472.0 41,089.7 46,772.8 53,641.1 Total Debt 1,527.4 1,909.1 1,659.1 1,409.1 1,159.1 Minority Interest 53.6 63.6 63.6 63.6 63.6 Total Liabilities 44,011.1 52,750.6 45,118.3 50,551.4 57,169.7

Total Gross Block 38,096.4 39,010.0 39,510.0 42,010.0 47,510.0 Less: Accumulated Depriciation 24,656.1 25,544.9 27,391.8 29,309.3 31,414.9 Net Block 13,440.3 13,465.1 12,118.2 12,700.8 16,095.2 Capital Work In Progress 2,903.4 3,496.0 5,996.0 6,996.0 5,496.0 Total Fixed Assets 16,343.7 16,961.1 18,114.2 19,696.7 21,591.1

Investments 1,981.4 2,395.0 2,495.0 2,595.0 2,695.0

Inventory 6,071.3 5,617.8 4,928.0 3,914.9 3,054.6 Debtors 5,667.9 10,480.2 9,316.1 8,962.4 8,448.0 Loans and Advances 14,502.3 17,370.1 17,721.9 18,189.6 19,583.3 Other Current Assets 2,983.2 4,248.9 4,728.1 5,158.5 5,402.5 Cash 58,202.8 62,236.6 56,828.4 65,422.3 73,973.3

Creditors 19,109.2 17,222.9 16,769.0 17,924.9 19,007.9 Provisions 43,826.4 51,591.3 54,499.4 57,718.2 60,825.3 Net Current Assets 24,491.9 31,139.5 22,254.1 26,004.7 30,628.6 Total Assets 44,011.1 52,750.6 45,118.3 50,551.4 57,169.7



Exhibit 55: Cash flow statement (| Crore)

(Year-end March) FY12 FY13 FY14E FY15E FY16EProfit after Tax 14,788.2 17,356.4 14,061.1 14,551.3 15,736.4 Depreciation 1,969.2 1,813.0 1,846.9 1,917.5 2,105.6 Cash Flow before WC changes 16,757.4 19,169.4 15,908.0 16,468.8 17,842.0

Net Increase in Current Assets (6,003.9) (8,492.4) 1,022.9 468.7 (262.9) Net Increase in Current Liabilities 13,592.8 5,878.6 2,454.2 4,374.6 4,190.1 Net cash flow from operating activities 24,346.3 16,555.6 19,385.1 21,312.1 21,769.2

(Purchase)/Sale of Fixed Assets (3,412.4) (2,430.4) (3,000.0) (3,500.0) (4,000.0) Net Cash flow from Investing Activities (4,274.3) (3,566.0) (3,100.0) (3,600.0) (4,100.0)

Inc / (Dec) in Equity Capital - - - - - Total Outflow on account of dividend (7,499.9) (10,166.1) (21,431.4) (8,868.2) (8,868.2) Inc / (Dec) in Loan Funds 6.4 381.7 (250.0) (250.0) (250.0) Net Cash flow from Financing Activities (7,675.6) (8,955.7) (21,693.4) (9,118.2) (9,118.2)

- - - - - Net Cash flow 12,396.4 4,033.8 (5,408.3) 8,593.9 8,551.0 Cash and Cash Equivalent at beginning 45,806.4 58,202.8 62,236.6 56,828.4 65,422.3 Closing Cash/ Cash Equivalent 58,202.8 62,236.6 56,828.4 65,422.3 73,973.3


Ratios Exhibit 56: Ratio Analysis

(Year-end March) FY12 FY13 FY14E FY15E FY16EPer Share DataEPS 23.4 27.5 22.3 23.0 24.9 Cash EPS 26.5 30.4 25.2 26.1 28.2 BV 64.0 76.7 65.1 74.1 84.9 Operating profit per share 24.8 28.6 22.8 23.7 25.4 DPS 10.0 14.0 29.0 12.0 12.0 Operating RatiosEBITDA / Total Operating Income 25.1 26.5 21.2 20.6 20.8 PAT / Total Operating Income 23.7 25.4 20.7 20.0 20.4 RoE 36.6 35.8 34.2 31.1 29.3 RoCE 32.6 32.3 29.4 27.0 25.4 RoA 33.6 32.9 31.2 28.8 27.5 Valuation RatiosEV / EBITDA 7.9 6.7 8.7 7.8 6.7 P/E 12.2 10.4 12.8 12.4 11.5 EV / Net Sales 2.0 1.8 1.8 1.6 1.4 Sales / Equity 1.5 1.4 1.7 1.6 1.4 Market Cap / Sales 2.9 2.6 2.7 2.5 2.3 Price to Book Value 4.5 3.7 4.4 3.9 3.4 Turnover RatiosAsset turnover 1.6 1.4 1.4 1.5 1.4 Debtors Turnover Ratio 11.0 6.5 7.3 8.1 9.1 Creditors Turnover Ratio 3.3 4.0 4.1 4.1 4.1 Solvency RatiosDebt / Equity 0.0 0.0 0.0 0.0 0.0 Current Ratio 1.4 1.5 1.3 1.3 1.4

Quick Ratio 0.5 0.5 0.5 0.5 0.5



Annexure Coal: Strategic asset for developing economies

Among all major sources of primary energy available, coal feeds ~30% of the energy needs globally. Its proportion amid primary fuel consumption varies from country to country wherein it is as low as 1.3% in the oil rich Middle East and as high as 68.5% in an emerging economy like China. In India, its proportion stands at 53% in CY12. Exhibit 57: World primary fuel (energy) consumption (CY12) (in million tonne oil equivalent)

Particulars OilNatural

gas CoalNuclear energy

Hydro electricity

Renewable Energy Total

Total North America 1017 820 469 207 156 57 2725

Total S. & Cent. America 302 149 28 5 166 16 665Total Europe & Eurasia 880 975 517 267 191 99 2929Total Middle East 376 371 10 0 5 0 762

Total Africa 167 111 98 3 24 1 403

Total Asia Pacific 1389 562 2609 78 289 64 4992

Total World 4131 2987 3730 560 831 237 12477

China 484 129 1873 22 195 32 2735India 172 49 298 7 26 11 563

Source: BP Statistics, ICICIdirect.com Research

Exhibit 59: India primary fuel consumption by fuel type (CY12)

Renewables2%

Hydro electricity5%

Nuclear energy1%

Coal53%

Natural gas9%

Oil30%


In developed economies like the Americas and Europe, coal

constitutes ~17% of primary fuel consumption whereas in Asia

Pacific its proportion stands at ~52%

Coal meets 30% of the world’s primary energy requirement,

second only to oil, which meets 33% of primary energy

requirement

Exhibit 58: World primary fuel consumption by fuel type (CY12)

Renewable Energy2%

Hydro electricity7%

Nuclear energy4%

Coal30%

Natural gas24%

Oil33%


In India, coal meets 53% of primary fuel consumption whereas oil

meets 30% of primary fuel consumption


Reserves World coal reserves as of December 2012 are enough to feed the coal needs for at least another 100 years (reserves to production ratio at 109) wherein Asia Pacific constitutes a healthy ~31%. Major developing economies like China and India constitute 13.3% and 7% of world reserves, respectively.

India has very large resources of coal with proven resources in excess of 110 billion tonnes, majority of which consists of non-coking coal to the extent of ~85%. As of April 2012, total coal resources of India are 293 billion tonne as per the estimates of the Geological Survey of India. Jharkhand, Odisha and Chhattisgarh comprise a massive 70% of the total coal resources of India. Jharkhand leads the race with 27.5% followed by Odisha, which has 24.4% and Chhattisgarh that has 17.4%,

Exhibit 62: World coal statistics (CY12) (unit: MTOE)

Region Production ConsumptionTotal North America 558 468Total S. & Cent. America 62 28Total Europe & Eurasia 469 517Total Middle East 1 10Total Africa 149 98Total Asia Pacific 2607 2609Total World 3845 3730China 1825 1873India 229 298

Source: BP Statistics,ICICIdirect.com Research

Exhibit 60: World coal reserves (million tonne)

Region

Anthracite and

bituminousSub- bituminous

and lignite TotalShare of total (%) R/P ratio

Total North America 112835 132253 245088 28.5 244Total S. & Cent. America 6890 5618 12508 1.5 129Total Europe & Eurasia 92990 211614 304604 35.4 238Total Middle East & Africa 32721 174 32895 3.8 124Total Asia Pacific 159326 106517 265843 30.9 51China 62200 52300 114500 13.3 31India 56100 4500 60600 7.0 100Total World 404762 456176 860938 109


Exhibit 61: Indian geological resources (million tonnes)

Type of Coal Proved Indicated Inferred Total(A) Coking :- -Prime coking 4614 699 0 5313 -Medium coking 12837 11952 1880 26669 -Semi-coking 482 1003 222 1707Sub-total coking 17933 13654 2102 33689(B) Non-coking:- 99618 128416 30282 258316(C) Tertiary coal 594 99 800 1493Grand Total 118145 142169 33183 293497

Geological resources of coal (in million tonne)

Source: Ministry of Coal, GSI (as on 01/04/2012)

Exhibit 63: World coal production share (CY12) (MT)

Region Production % ShareTotal North America 1002.8 12.8Total S. & Cent. America 97.3 1.2

Total Europe & Eurasia 1281.0 16.3Total Middle East & Africa 265.6 3.4Total Asia Pacific 5218.0 66.3Total World 7864.5 100.0China 3650 46.4India 605.8 7.7

Currently, world coal production surpasses its consumption except

for regions like India, which are still net coal importers

Asia Pacific constitutes the lion’s share of about 66% share in

coal production. India, in particular, contributes 8% of world coal

production

CIL contributes 81%; SCCL contributes 9.5% whereas others

contribute the residual ~9.5%

Exhibit 64: Domestic coal production & imports Particulars FY07 FY08 FY09 FY10 FY11 FY12 FY13CIL 361 380 404 431 431 436 452SCCL 38 41 45 50 51 52 53Others 32 37 45 50 50 52 52Total domestic availability 431 457 493 532 533 540 558Coking coal imports 18 22 21 25 20 32 33Non coking coal imports 25 28 38 49 49 71 105Total imports 43 50 59 73 69 103 138Total availability 474 507 552 605 602 643 695

Source: Ministry of Coal, Crisil, ICICIdirect.com Research



Coal India Map Exhibit 65: Coal India : Geography

Source: CIL DHRP, ICICIdirect.com Research


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ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]

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